Swiss Re stays positive despite profits slide

The world's largest reinsurer can't escape the subprime crisis Keystone

The world's biggest reinsurer, Swiss Re, has posted a 2007 profit of SFr4.2 billion ($4 billion), a drop of nine per cent on 2006.

Its fourth quarter profit was particularly hit by the market fallout from the United States subprime crisis, crashing by 87 per cent to SFr170 million. But the financial giant asserted that it continued to display “fundamental underlying strength”.

The Zurich-based company’s overall result still managed to beat analysts’ expectations and executives hailed it as the second-best result in the firm’s 144-year history.

Swiss Re CEO Jacques Aigrain portrayed the result as “solid” in the midst of what he characterised as a “year of contrast”. However, the firm would have had the potential to add more to its bottom line, he said.

In a media conference on Friday, he heaped praise on Swiss Re’s property and casualty division, which had posted record results.

The premiums reached almost SFr19 billion in 2007 – a SFr500 million increase over the previous year. Around SFr1.2 billion was paid out for summer natural disasters.

Analysts were generally pleased by the figures.

“In an environment where you don’t know what catastrophe will be behind the next corner this comes as a very pleasant surprise,” said Dieter Winet of Swisscanto Asset Management.

KBW analyst William Hawkins said in a note that the fourth quarter results were better than expected. “There has been no material deterioration in the structured credit portfolio and no visible sign of contagion to others parts of the business,” he said.

Subprime fallout

Swiss Re said that net profit for October to December tumbled to SFr170 million compared with SFr1.3 billion for the same period in 2006.

In November last year, Swiss Re announced that it had been impacted by what it called an “isolated, yet significant” loss of SFr1.2 billion in its underwriting activities.

Unfortunate credit swaps – instruments which provide protection against declining portfolios – were to blame, Swiss Re said.

The firm says it has now removed itself completely from the equities market, but was planning on returning under more favourable conditions.

“We took immediate action to strengthen the risk taking and supervision processes, and have ceased writing new structured credit derivative transactions, butting the existing portfolio into run-off,” Chief Executive Officer Jacques Aigrain said in a statement.

Not in the clear

However, the company added that it was not completely in the clear – it expects credit default swaps to cost it another SFr240 million in 2008.

“Swiss Re expects property and casualty market conditions to remain challenging in the short term,” the company said in a statement. “The January renewal season confirmed this trend.”

The heavy US influence on the Swiss firm was not limited to bad mortgages, however. Swiss Re is facing legal action in the US, where a New York law firm has filed suit on behalf of US investors who say they lost out when Swiss Re share prices dropped sharply following the writedowns.

The claims – which Swiss Re denies – are part of what may become a class action lawsuit.

In terms of outlook for 2008, Swiss Re said it remained optimistic about future growth, despite the challenging conditions of the market.

Investors responded to Friday’s results with enthusiasm, driving shares up more than five per cent on the news.

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Swiss Re

The company, based in Zurich, is the world’s largest reinsurer. Reinsurance is the business of insuring the insurers.

Founded in 1863, it operates through offices in more than 25 countries.

The company’s reinsurance products for property and casualty, as well as the life and health business, are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management.

Credit default swaps

Credit default swaps are usually bought by bond investors, who seek insurance against potential market losses.

When bonds lose their value fast, the insurer has to pay out claims that help investors recover some losses.