Swiss Re Returns to Profit on Higher Premium Income (Update2)

By Warren Giles
Bloomberg News
May 7, 2009

May 7 (Bloomberg) -- Swiss Reinsurance Co., the world's second-biggest reinsurer, returned to profit in the first quarter on higher premiums after a record loss in the previous three months. The stock gained the most in 14 weeks.

Net income fell to 150 million Swiss francs ($132 million) from 624 million francs a year earlier, the Zurich-based company said in a statement today. That beat the 44 million-franc median estimate of seven analysts in a Bloomberg survey. The reinsurer reported a loss of 1.75 billion francs in the fourth quarter.

Swiss Re increased premium income from property and casualty, its biggest business, by 5 percent. The company, which is cutting more than a 1,000 jobs this year after turning to Warren Buffett for a 3 billion-franc injection, expects to generate 1 billion francs in capital over the next 12 months from cutting investment portfolio risk.

"With asset prices showing some signs of stabilization, our concerns that the group will need to raise equity at distressed prices have lessened," Collins Stewart analyst Ben Cohen wrote in a note to investors. He upgraded his rating on the stock from "sell" to "buy."

Swiss Re gained as much as 20 percent and was 19 percent higher at 34.9 francs at 1:21 p.m. in Zurich, trimming this year's decline to 31 percent. The stock is the worst performer in the 33-member Bloomberg Europe 500 Insurance Index.

New Management

The company has changed its top management after a strategy of trading securities led to a loss last year. Walter B. Kielholz, who replaced Chairman Peter Forstmoser this month, and Chief Executive Officer Stefan Lippe, who succeeded Jacques Aigrain in February, have promised shareholders to invest premium income "more conservatively."

"This is a huge change for the firm, a completely different approach to investment risk," Chief Financial Officer George Quinn said in an interview.

Swiss Re has disbanded its financial markets unit as part of a "de-risking" strategy after losses on contracts sold to protect clients against declines in fixed-income securities.

"We hope we can make some fairly significant progress this year in de-risking, and at the end of the year report a significant dent in it," said Quinn. While the legacy unit, which is responsible for selling risky assets, reported operating income of 12 million francs in the quarter, "there's a higher probability you'll see a small loss" as it makes transactions throughout the year, he added.

The company reiterated a plan to cut 400 million francs of costs by the end of 2010 and said it aims to repay the Berkshire Hathaway debt at the earliest possible date after March 2011 to avoid diluting shareholders' capital.

"We have improved the capital position but we're not in a luxury capital position," said Quinn. "However much anyone has no-one would say they don't want more in the current environment, but is it sufficient? Yes."

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