Storms hit Swiss Re earnings

Ann Godbehere

Swiss Re's net profit fell 41 per cent last year, a bigger drop than expected, as the costliest US hurricane season on record hurt its non-life reinsurance units and sent its shares lower this week.

The world's second-largest reinsurer by market value made a profit of 1.45 billion Swiss francs ($1.66 billion), hit by 3 billion francs in large natural catastrophe claims.

The group also lost money on its underwriting portfolio. The stock was down over 4 per cent in late trading.

Swiss Re, about to close the US$7.6 billion ($11.4 billion) acquisition of the reinsurance units of General Electric, said the year had started well and prices paid for reinsurance cover were stable at "satisfactory" levels.

"The year started off very well, [the contract renewals were] very good. We expect the non-life renewals for the remainder of the year also to be very good," said chief financial officer Ann Godbehere.

Swiss Re also said its combined ratio - a key profitability gauge measuring costs and claims over premium income - rose to 108.7 per cent. The higher the ratio stands above 100 per cent, the bigger the underwriting loss.

The company's combined ratio could well improve to 95 per cent on the back of business that it renewed this year, Godbehere said.

Despite the profit drop, Swiss Re said it would raise its dividend to 2.5 francs per share from 1.6 francs in 2004. The average forecast in a Reuters poll of 24 analysts was for full-year net profit of 1.72 billion francs, with the joint ratio forecast at 104.5 per cent.

Swiss Re said the rise in catastrophe claims last year were largely due to Hurricane Katrina, which struck the US Gulf Coast in August.

The company said it had used 613 million francs out of its equalisation reserves to mitigate the catastrophe claims, having raised its estimate for claims from the three costly US hurricanes Katrina, Rita and Wilma by 10 per cent.

New US accounting rules that Swiss Re will adopt this year do not allow the use of such reserves, and some analysts had assumed the group would use all of the money ahead of the change, and had expected a better result.

Swiss Re shares were down 3.9 per cent at 90.20 francs, off a low of 89.65 francs.

Swiss Re's shares are the worst performers this year on the 31-member Bloomberg Europe Insurance Index, falling 2.4 per cent compared with a 7.5 per cent gain in the index.

"We are slightly disappointed by the composition of the result ... Swiss Re's combined ratio was 108.7 per cent, almost four percentage points above the consensus estimate which stood at 105 per cent," Bank Leu said.

Swiss Re's premiums earned declined by a bigger-than-expected 6 per cent to 27.8 billion francs. The group said US regulatory probes into so-called non-traditional reinsurance had made clients wary of signing such contracts.

Non-traditional reinsurance contracts have been criticised by regulators as being open to abuse by firms wanting to flatter their balance sheets.

The investment result increased 11 per cent to 6.6 billion francs, for a 5.7 per cent return on investment.

Swiss Re won approval at a shareholders' meeting on Monday for a US$7.5 billion capital raising to finance its acquisition of the GE reinsurance units.

The purchase, expected to close in the middle of the year, will make Swiss Re the company with the largest reinsurance premium volume in the world, surpassing Munich Re.

"People are waiting to see first if they can integrate the acquisition and deliver the earnings they're aiming to achieve," said one trader.

Swiss Re shares trade at 10.12 times expected earnings for next year, below a sector average of 12.11, according to Reuters Analytics. Analysts say they see little upside as long as the acquisition is pending.

Swiss Re said the second half alone includes US$1.2 billion for Katrina and US$750 million for Hurricanes Rita, which struck Texas and Louisiana in September, and Wilma, which crossed Florida in October.

Last summer, record floods also hit Switzerland, southern Germany and parts of Austria.

Swiss Re also sold bonds backed by insurance to shift some exposure off its books. The company in 1997 was among the first reinsurers to sell catastrophe bonds as a means to transfer risk.

It sold US$370 million in securities backed by future profit from US life insurance policies in December. In February it sold US$100 million of bonds to transfer risk from insuring against earthquakes and cyclones in Australia.

- REUTERS, BLOOMBERG