Swiss Re fourth-quarter net profit falls 87% on bad loans

29 February 2008

ZURICH – Swiss Reinsurance Co. reported an 87% drop in fourth-quarter net profit on Friday, blaming massive write-downs linked to bad loans.

The world’s largest reinsurer said its net profit during the three months to December was CHF170 million compared with CHF1.3 billion in the year-earlier period.

The Zurich-based reinsurer said a CHF1.2 billion pretax loss reported in November hit its bottom line, and it expects further write-downs of some CHF240 million in the current year.

The losses were the result of credit default swaps gone bad, Swiss Re said.

Credit default swaps are usually bought by bond investors, who seek insurance against potential market losses. When bonds lose their value fast, the insurer has to pay out claims that help investors recover some losses.

Swiss Re said the business unit at which the losses occurred was marginal to its credit underwriting operations and would be closed down.

“We have learned from the mistake and are confident that we have a stronger organization as a result,” the company said in a statement.

A New York law firm on Wednesday announced it was organizing a class action lawsuit on behalf of US investors who lost out when Swiss Re share prices dropped sharply following writedowns.

Coughlin Stoia said Swiss Re violated U.S. Securities Exchange Act rules by providing misleading information about its financial condition, a charge the company denies.

Premiums in Swiss Re’s property and casualty division rose 2%, reflecting the inclusion of General Electric Co’s reinsurance unit which it acquired in 2006 for around US$8 billion.

In 2007, premiums from property and casualty insurance reached almost CHF19 billion compared with CHF18.5 billion a year, the company said.

As a result, Swiss Re’s combined ratio – an industry benchmark that compares costs and claims to premium income – improved by 3 basis points to 90.2% from 90.5% the previous year. A level below 100% means the business is profitable.

The group’s overall net income, including its financial business and life and health insurance, fell 9% to CHF4.16 billion from CHF4.56 billion in 2006. Analysts had expected full-year profit to be closer to CHF4 billion.

Investors responded positively to the results, with Swiss Re shares rising 4.9% to CHF83.90 on the Zurich exchange. The company said it would propose increasing its dividend by 18% to CHF4 from CHF3.40 in 2006.

Reinsurance companies sell backup coverage to other insurers, spreading risk so the system can handle huge losses from major disasters.