By John Letzing
ZURICH--Swiss Re AG (SREN.VX) has concluded that in the current
market it makes more sense to use its money to pay down debt rather
than to invest.
The Zurich-based reinsurance giant said Monday in a prelude to
its annual investors' day that it plans to reduce leverage by more
than $4 billion by 2016, as it shifts focus from trying to wring
returns from a relatively low-risk investment portfolio to cutting
back on obligations.
Swiss Re Chief Financial Officer George Quinn said during a call
with reporters that while the firm's debt load is relatively cheap
to maintain thanks to low interest rates, "it's not free."
"We have to pay more on the money we've borrowed than we make on
investements we've made," Mr. Quinn said.
The debt reduction is part of a broader streamlining push that
Swiss Re hopes will result in as much as $300 million in cash
savings by 2015. The overall effort does not currently include any
"job cut, or job reduction program," Mr. Quinn said.
Swiss Re's remarks come as the company seeks to bolster overall
returns, revamp a suffering U.S. life and health business dating
from before 2004, and brace for any impact from recent severe
flooding in Central Europe. Mr. Quinn said Swiss Re does not yet
have an estimate for the impact of the flooding, which was the
worst the region had seen in more than a decade.
German insurance giant Allianz SE (ALV.XE) recently estimated
the gross impact on the firm due to the floods would likely be more
than 500 million euros ($656 million), resulting in a net loss
after reinsurance of roughly EUR350 million.
One cost Swiss Re is currently able to account for is related to
bolstering the firm's life and health reinsurance lines. The firm
said it expects to improve return on equity at the unit to between
10% and 12% by 2015, from around 5% currently. But rejigging the
business in the short term will trim about $500 million in pre-tax
profit from results in 2014, Swiss Re said.
A specific laggard for the life and health business has been the
firm's U.S. life portfolio of business written prior to 2004. The
firm is therefore in talks with clients about shifting
responsibilty for related risk, Mr. Quinn said.
Mr. Quinn said much of the $500 million in costs expected from
the effort can be attributed to an arrangement with Warren
Buffett's Berkshire Hathaway Inc. (BRKA). Under the terms of a
recent settlement, Berkshire paid Swiss Re $610 million to
re-assume responsibility for some renewable term-life policies sold
in the U.S. before 2004--though the deal also capped Berkshire's
responsibility for some of the policies covered at $1.05 billion,
rather than the original $1.5 billion.
Write to John Letzing at john.letzing@wsj.com
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