Swiss Re-structures: all change at the reinsurance giant

Swiss Re chief executive Stefan Lippe unveiled a new leadership structure at the beginning of October and a reorganisation of the company’s business into three units: reinsurance, corporate solutions, and admin reinsurance (known as Admin Re). He also announced a replacement for Raj Singh, the company’s chief risk officer, who is leaving the firm for personal reasons.

David Cole was named as Singh’s successor as well as a member of the executive committee. He will join Swiss Re on 1 November 2010 to spend time with Singh before his departure in March. Cole joins the reinsurer from ABN AMRO, where he spent 11 years, most recently as head of group risk management for ABN AMRO Bank.

Given Cole’s background in the banking sector, Tim Dawson, an analyst with Swiss-based Helvea, thinks he will need to adjust to the different set of risks presented by a reinsurance company, particularly the liability side of the balance sheet. Singh will be a hard act to follow, but his departure does not ring alarm bells. “Inevitably, if someone like a CFO or CRO leaves everyone thinks, ‘What have they just found?’ But the fact Singh is staying on until March next year is a pretty strong indication that there are no skeletons in the closet.”

Good call, bad call

The restructuring of the company into three main units could raise some eyebrows, Dawson believes. The decision to ring-fence large corporate insurance business into a dedicated corporate solutions entity is a familiar tactic for Swiss Re and one that has not had much success in the past. “They were doing the same thing in the 2000/01 period and got into some sticky situations,” Dawson says. “They lost quite a lot of money – particularly in the pharmaceutical areas in that business. But I think the chance of them repeating the errors of 10 years ago are pretty small.”

In fact, Dawson praises the firm’s performance since the financial crisis. As a result of the crisis, Swiss Re suffered a $1bn writedown because of of two credit default swaps (CDSs), which sparked downgrades, subsequent losses, a quota share with Berkshire Hathaway (when legendary Sage of Omaha Warren Buffett rode to the rescue in return for 20% of the reinsurer’s P&C business), senior management changes (including the decision in February 2009 to replace then chief executive Jacques Aigrain with Lippe), and a corporate restructuring.

“The run-off of the legacy operations has been remarkably unproblematic – market conditions have helped – but anyone watching a year and a half ago will be surprised quite how well it’s worked out,” says Dawson. “The back-to-basics approach – and frankly there was no option – does seem to have worked quite well. One thing you have to say is that all during the crisis period the underwriting and risk management sides of the business performed extremely well.”

The future’s brighter

Most observers feel that Swiss Re has done well so far under Lippe, and the future certainly seems to be looking brighter after a profitable year in 2009: net income was CHF506m ($525m). Despite some catastrophe losses in the first half of this year, the Atlantic hurricane season has so far failed to bring major losses and, while rates are softening, 2010 is shaping up well for the company: profit for the first half of the year was CHF970m. In early October, a US judge dismissed an investor lawsuit against Swiss Re for losses relating to the CDSs. This was soon followed by a positive rating outlook from Standard & Poor’s, suggesting the firm is close to regaining its coveted AA rating.

“The outlook revision reflects our view that Swiss Re’s financial strength has recovered considerably because of the speed and effectiveness of its de-risking process and the resilience of its franchise,” says S&P, adding that “the potential for the discontinued operations to produce further substantial losses appears to be reducing, which should facilitate strong and more-stable earnings over the rating horizon.”