Swiss Re Q3 Profit Tops Forecasts; Capital Strengthened

By | November 3, 2009

Swiss Re strengthened its capital in the third quarter, it reported on Tuesday, boosting its chances of repaying a costly convertible loan from Warren Buffett as it beat operating profit forecasts in its core businesses.

Fat operating margins and gains on sales of once-illiquid structured credit default swaps (CDS) ensured a healthy profit, even as group premiums dipped 11 percent and write downs on corporate bond hedges again ate into earnings.

Its shares were indicated to open 4.8 percent higher, according to pre-market data from bank Clariden Leu.

The world’s second-biggest reinsurer posted a net profit of CHF334 million ($324 million) for the third quarter, against an average estimate of CHF115 million [$111.5 million] profit in a Reuters poll.

Its property and casualty combined ratio, a measure of profitability, improved to 84.5 percent from 99.6 percent a year earlier, showing wide margins. A combined ratio below 100 percent shows insurance operations are profitable.

“The results are clearly better than expected. The combined ratio of 84 percent is sensational,” a trader said.

The company’s shareholder equity increased by CHF2.4 billion [2.327 billion] to CHF26.2 billion [$25.4 billion] by the end of the quarter due to net unrealized investment gains on securitized products, as well as corporate and government bonds.

“During the first nine months of 2009, our excess capital at the ‘AA’ level improved to over 6 billion Swiss francs,” Chief Executive Stefan Lippe said in a statement. “The outlook for our company is encouraging.”

The Zurich-based reinsurer’s shares hit a record low of CHF11.88 |$11.52] in March, shortly after capital levels depleted by billions in write downs on illiquid assets forced it to accept a CHF3 billion [$2.9 billion] convertible investment from Buffett’s Berkshire Hathaway.

The stock recovered to almost CHF50 [$48.49], but came under pressure in the run-up to results to close at CHF42.40 [$41.13] on Monday. The overall recovery has prompted some analysts to argue Swiss Re should raise fresh capital from shareholders and repay Buffett early in a show of renewed vigour to investors and rivals.

“The stock could start a strong rally after the recent price pressure,” a second trader said, adding that the combined ratio showed how much money was being made. “Whether gross premiums are a bit lower does not matter.”

($1=1.021 Swiss francs)

(Additional reporting by Rupert Pretterklieber; Editing by Greg Mahlich)

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