Swiss Reinsurance Company Ltd (SWCEY.PK)
Q2 2010 Earnings Call Transcript
August 5, 2010 8:30 am ET
Susan Holliday – Head, IR
George Quinn – CFO
Stefan Lippe – CEO
Michael Huttner – JP Morgan
Spencer Horgan – Deutsche Bank
William Morgan – Goldman Sachs
James Quin – Citigroup
William Hawkins – KBW
Brian Shea – Bank of America/Merrill Lynch
Andrew Ritchie – Autonomous Research
Jean-Francois Tremblay – RBS
Marcus Rivaldi – Morgan Stanley
Fabrizio Croce – Kepler
Good day and welcome to the Swiss Re’s second quarter 2010 results conference call. Today’s conference is being recorded. At this time, I would like to turn conference over to Ms. Susan Holliday. Please go ahead.
Thank you, and good afternoon and good morning, everybody. The kind of running order for this afternoon will be that George Quinn, the CFO, will take us through the results for Q2 2010. And then Stefan Lippe, the CFO [ph], will make some comments about the July renewals and the outlook for the company. And after that, we'll have time for Q&A.
So, with that, I'd like to hand over to George.
Yes. Susan, thanks. It's not often that Susan makes a mistake in the introduction, but Stefan is the CEO. Thank you again. And good afternoon or good morning to you, depending where you are. I'm going to start on slide four of the presentation. So we've reported Q2 net income of $812 million, which is – which compares to a loss of $342 million in the same quarter last year. This translates into an ROE of 13.4% on an annualized basis for the quarter.
We also saw continued growth in book value. It's now up to $27 billion in shareholders' equity, or about a bit more than 78 Swiss francs per ordinary share. Measured in Swiss francs, the book value per share has risen by about 9% over the course of the quarter.
We continue to maintain a high level of excess capital, and we reported today that we estimate that the Group is holding more than 10 billion above the minimum AA requirement at the end of Q2. It's fallen over the course of the quarter through a combination of the dollar movement in the quarter, the impact of interest rates, and also changes to the model that's been applied. It's comfortably more than it is needed to deal with the Group's key priorities over the next year, in particular the redemption of the convertible. Just a reminder, on a pro forma basis, were we to redeem it today at the premium, the Group would still sit with a substantial excess above the target level that we had discussed last year.
P&C's underlying performance was good, but the headline result is impacted by higher than expected losses, and I'll come on to that in a second.
Life & Health shows a substantial improvement over last year, but it's not particularly meaningful comparison given the result in the second quarter of 2009. Life & Health does continue to be impacted by the low interest rate environment, and in particular the way that we allocate investment income to this segment. I'll go into that more in a bit later in the presentation.
Asset Management's produced an excellent result in the quarter, which drives not only the asset management result but also drives the Group items figure. I'll mention that a bit later. The return on investments, on a GAAP basis, was 5.8%, and the total return was 13.2%. I've commented already today, and for reasons that are probably obvious, we don't see these as sustainable returns going into the remainder of the year. But I will comment on the running yield when we get to asset management.
On Legacy, we've made further good progress, but we have reported a small loss. But the team has completed most of the key de-risking targets for Legacy.
I'll now switch to slide seven. Premiums earned are down 21% in the quarter. And this is mainly driven by the renewal in January. And I think the reasons for that shift are well known to you. The reduction in written premium predicted by the renewal was about 15%.
In addition, this quarter, and this is a difference in this quarter, we've adjusted the earnings pattern that we apply to premiums with natural catastrophe exposure. This has an additional effect of reducing the earned premium by about 6% in the second quarter 2010.
In operating income you see a fall mainly driven by the claims that we had previously announced in the quarter, so, for example, the impact of our estimate for Deepwater Horizon of $200 million and the change that we announced in the Chile earthquake estimate of $130 million. These numbers are unchanged from the figures we've given earlier in Q2. Obviously, both of these losses also impact the combined ratio, where we've suffered excess nat cat losses. But here the impact is only about 2 points more than we would normally expect in the quarter, and the remainder of the loss in excess of expectations essentially comes from Deepwater. And you can pick any of the items that contribute to the excess loss on the liability side, but this is obviously the most significant.
Underlying, we believe we're tracking in line. And Deepwater on its own would be about 8 points. But we still think that we are in line, if not slightly better, than the guidance that we gave earlier in the year around the combined ratio.
Investment income for the segment also declined, as interest rates fell and reserves ran off. But the expense ratio is stable, despite the fall in earned premium, and that's of course at least partly driven by the efforts that we've made on the efficiency side.