Swiss Re Shuns Low-Margin Accounts; Weighs Where to Deploy Capital

By | August 6, 2010

Swiss Re would return capital to shareholders rather than underwrite low-margin business, its chief financial officer told Reuters, in a sign of confidence in the world’s second-biggest reinsurer’s renewed capital strength.

“If the market doesn’t improve and we don’t have places to deploy capital at the right rates of return, then we have to look to return it to shareholders,” said George Quinn in an interview.

“Dividends and buybacks are two of the more obvious mechanisms to do that.”

Risky assets backfired in the crisis, forcing Swiss Re, the world’s second largest reinsurer, to take a costly 3 billion Swiss franc ($2.88 billion) convertible loan from Warren Buffett’s Berkshire Hathaway, a competitor.

The reinsurer confirmed on Thursday that it has enough capital to pay off Buffett comfortably and will do this sooner rather than later after the one-year repayment window opens in March 2011.

“We would deal with the redemption of the Berkshire loan first and then if our problem is still that we have too much capital and not enough opportunity we’ll have to do something about it,” Quinn said.

Swiss Re revealed a disappointing underwriting performance in the second quarter, sending its shares lower even though investment gains helped lift profits beyond expectations.

The company had made a conscious decision to drop low-margin business this year, Quinn said. Some analysts would like to see more business underwritten to increase profits.

“We compete like crazy to make sure we get to see the best pieces of business. We try and optimise the portfolio and drop the stuff that isn’t giving us what we hoped to get, but it’s a diminishing return equation in the current market environment,” Quinn said.

Low interest rates had lasted longer than anticipated, hitting investment returns, and could persist even longer in Europe, meaning insurance companies would have to make their profits from underwriting and not investments, Quinn said.

While it might take a large natural disaster to push up property reinsurance prices substantially, prices in the casualty market could rise soon, said Quinn.

Some competitors had priced casualty business too low on the assumption investment returns would increase alongside higher interest rates.

“There’s been a lot of optimism about higher investment returns and I think that optimism has waned substantially,” said Quinn. “We must be closer to the point where casualty prices turn.”

(Editing by Greg Mahlich)

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