Swiss Re joined the ranks of European insurers and reinsurers, who have been impacted by the global financial crisis. The world’s biggest reinsurer reported a 53 percent drop in second quarter net income to CHF 564 million ($536 million), compared to CHF 1.194 billion ($1.134 billion) in Q2 2007.
Investment losses and decreased premium revenue combined to produce the adverse results. Premiums earned dropped by 23 percent to CHF 6.114 billion ($5.8 billion) from CHF 7.995 billion ($7.6 billion). Swiss Re explained that the decrease was the result of “disciplined underwriting, the quota share agreement with Berkshire Hathaway, as well as the impact of foreign exchange movements.”
Swiss Re said its net investment income for the second quarter was CHF 2.0 billion ($1.9 billion), “a 22 percent decrease compared to the prior year period.” However its investment income from corporate and government bonds increased 5 percent at constant foreign exchange rates, which “more than offset by the negative performance of listed and private equity. Foreign exchange movements had a negative effect of 10 percent quarter on quarter.”
Weaknesses in world financial markets were mainly responsible. Swiss Re said its “net investment income decreased 15 percent to CHF 1.9 billion [$1.8 billion] versus the second quarter of 2007. At constant foreign exchange rates net investment income decreased 5 percent. The running yield increased to 5.2 percent from 5.0 percent in the respective periods. Net realized losses amounted to CHF 0.9 billion [$855 million] in the second quarter of 2008, compared to gains of CHF 0.3 billion [$285 million] in the second quarter of 2007.”
As previously announced, Swiss Re said the “change was primarily due to the mark-to-market loss on the trading portfolios and interest rate derivatives, as well as to realized losses on the sale of corporate bonds. Interest rate derivatives are used to match the fixed income portfolio to the duration of the insurance liabilities. The hedges were effective from an economic standpoint, but contribute, in the shorter term, to volatility in the Group’s return on investment. In addition, the structured credit default swaps in run-off incurred a further mark-to market loss of CHF 362 million [$344 million] in the second quarter of 2008.”
CEO Jacques Aigrain commented: “The continued strong performance of Property & Casualty and Life & Health demonstrates our ability to generate healthy operating earnings, even in challenging market conditions. The financial market turbulence continues, but, despite this, we are strongly capitalized and our investment portfolio remains sound.”
However, having been burned, Swiss Re remains cautious about the near term future, especially in relation to the financial markets. In a note to the second quarter accounting figures, the Company cited its writedown of CHF1.2 billion ($1.14 billion) in “mark-to-market loss arising from its exposure to two related structured credit default swaps written by its former Credit Solutions business.
“For 2007, the mark-to-market loss was CHF 1.3 billion [$1.235 billion] before tax, and, for the first two quarters of 2008, Swiss Re reports a further loss of CHF 1.2 billion [$1.14 billion].”
Swiss Re then warned that with respect to these credit default swaps, that it “remains exposed to continued fluctuations in the market value of the underlying securities and could be required to report further mark-to-market losses. Were the credit markets to continue to deteriorate, Swiss Re could face further losses in other areas of its portfolio, including other structured instruments it holds.
“The deterioration in the credit markets has had, and can be expected to have (at least in the near term), an adverse impact on the ability of market participants, including Swiss Re and its counterparties, to value credit default swaps and other credit-related instruments.”
The full report, related information and access to the investors’ teleconference may be obtained on the Group’s web site at: www.swissre.com.
Source: Swiss Re
Topics Profit Loss
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