Back on track-with Fred Kleiterp

Swiss Re reported a respectable net profit of CHF506m for 2009 against a loss of CHF864m the year before. Shareholders’ equity increased to CHF26.2bn at the end of 2009, compared to CHF20.5bn at the end of 2008, down from CHF31.9bn at the end of 2007. Estimated excess capital over the AA credit rating level stood at CHF9bn. Crisis? What crisis?

The Swiss Re Property & Casualty business played its part in the recovery last year with an operating profit that rose 39% to CHF3.8bn in 2009 from CHF 2.7bn in 2008. As a result of careful underwriting and lower levels of natural catastrophe losses, the combined ratio improved to 88.3% for the full year, compared to 97.9% in 2008.

As part of this recovery process, the Group said farewell to its former chief executive and ex-banker Jacques Aigrain and promoted Stefan Lippe, a reinsurance man, to the post. The shot in the arm provided by Berkshire Hathaway came in the form of a convertible perpetual capital instrument that saw the opportunistic U.S. group take a CHF3bn investment in the group.

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The recovery continued in the first quarter as the Group reported a net profit of $158m for the first quarter of 2010. Shareholders’ equity increased by $835m to $26.2bn in the first quarter of 2010, driven mainly by mark-to-market gains on fixed income securities that amounted to $1.1bn. The estimated excess capital position at the AA level increased to more than $12bn.

Most of this year-end and first quarter profit was driven by the reinsurance business for which Swiss Re is best known. But, the Group’s direct primary business accounted for about 9% of total P&C premiums written in 2009, that last year reached some CHF13.9bn.

The majority of this business was sourced in the U.S. where Swiss Re has an established primary operation branded Industrial Risk Insurer that came to the group via the acquisition of G.E. Insurance Services in June 2006.

Because of the strength of that brand Swiss Re continues to use IRI in the U.S., but trades as Swiss Re in Europe and Asia where it is so much better known under that name.

DO ‘MUCH MORE’

Fred Kleiterp is the man in charge of Swiss Re’s large corporate primary and specialty business in Europe and he believes Swiss Re can do ‘much more’ from this base in Europe and Asia for corporate customers.

But, like all good insurance company managers, Mr. Kleiterp vows that growth will not be pursued at the price of profitability and this certainly did not occur last year as the Group fought to rebuild its capital base and reputation following the serious damage inflicted on the group by the credit crisis.

As such, the primary business delivered its contribution to Swiss Re’s impressive 2009 overall combined ratio of 88.3% (or 86.5% excluding unwind of discount) for the full year, compared to 97.9% (96.1%) in 2008.

Mr. Kleiterp said that this ratio was ‘among the best in the industry’ adding that the primary business again played its part by taking the same disciplined approach to underwriting as the rest of the Group.

“Capacity is always a function of return, where we believe most returns can be made. We will never buy market share at prices that are inadequate and we are always looking for pockets and niches where adequate returns can be made and where we have the capital to play a significant role. There is no shortage of capital,” he explained.

For this reason Mr. Kleiterp said that it is difficult to single out any particular country where growth is targeted because it is very dependent upon the position of the major customers, where they seek growth and the company is willing and able to support that growth.

As with all big companies, the structure of the operation is an important factor that helps determine its ability to spot and exploit opportunities. As such, Swiss Re hopes to combine its global reach with local presence to deliver what customers demand.

LOCAL FOCUS

“We want to become more local to deal with retail brokers in European retail markets more directly. Most brokers see Swiss Re as a reinsurance company. We would like to send the message that we do insurance too and provide a local service for brokers. This is the most important thing,” he continued.

One example of this approach was the Group’s recent decision to open an office in Milan. Mr. Kleiterp said that this operation, that started officially in November, is going very well. He said that it has seen a lot of submissions since the launch and has written more business than expected.

“This proves that being local helps in markets to which you are committed to. The brokers welcome more quality markets to choose from naturally. We are also now looking at other European markets—there is no real limitation,” he said.

The overall state of the primary underwriting market has not helped in this regard as the widely expected hardening simply did not occur last year and has not exactly taken off so far this year.

According to Mr. Kleiterp this no-show by the hardening market can be blamed on three key factors: the absence of significant losses, particularly in Europe and the United States in 2009; the recession and pressure on companies to cut costs and a continued ‘abundance’ of capacity.

These three factors delivered a ‘very challenging’ environment, he said.

Mr. Kleiterp believes the market will change. But, he said that even if it does harden the market will remain highly competitive with serious competitive pressure. The key for underwriters in such an environment is to be different, he said.

This is why innovation, that Mr. Kleiterp said is ‘inherent in our DNA’, is so important and proven by Swiss Re’s track record in markets such as insurance linked securities, parametric covers and weather products.

The tricky question for an insurer is how do you deliver such innovation while at the same time effectively manage your own risk position. The key, according to Mr. Kleiterp, is to work out how to maximise the value of insurance for the customer and help them understand their risk profile better.

Captives play an important role in this effort and Swiss Re has been successful in offering multi-year and multi-line solutions to captives to help companies increase retention levels that they are comfortable with and able to step up over time, he explained.

Emerging risks play an important role in such an effort and Swiss Re has invested a lot of time, effort and money into the identification of new risks and ways to measure, manage and transfer them in recent years, pointed out Mr. Kleiterp.

“We take emerging risks very seriously. We dedicate resources to this area to figure out what is happening in the world and what it means for our clients. We like to understand them and use that knowledge for product development and the general development of the business,” he said.

BOUNCE BACK

But, this is not an easy area conceded Mr. Kleiterp. It is not always easy to fully understand the risks themselves and therefore develop a concrete cover in the time-scale demanded by customers, but the effort will continue, he promised.

The big positive surprise for Mr. Kleiterp last year was the speed and nature of the company’s recovery. The ability to deliver a stronger capital base for policyholders was key for Mr. Kleiterp and he was delighted with their support during the tough period.

“We were very pleased with the fact that clients came to place a lot of trust in us and the franchise is as strong as ever. We went through a very difficult time, but, we are completely renewed, ready for growth, confident and in good shape now,” he said.

Swiss Re, as with any other insurance and reinsurance company, also has to deal with external influences that can significantly affect the way it is able to deploy its risk capital regardless of how well they run their business. Solvency II, Europe’s planned new capital adequacy regime, is a good example of such an outlier.

Mr. Kleiterp for one, sees more opportunities than threats for Swiss Re basically because of its scale.

“It is good because it will make the cost of risk more transparent. For companies like ours Solvency II will provide us with opportunities to help clients understand their risk portfolio and capacity needs and help meet capital regulations. Diversity will be a key differentiator. Smaller captives, for example, may not have the diversity needed for capital efficiency and shedding peak risk. In this sense we can help them meet their capital needs over time. Therefore the modelling capability is the most important part as Solvency II makes the cost of carrying risk more transparent,” he explained.

CAPTIVE QUESTIONS

Mr. Kleiterp believes that smaller captives may have to close as a result of the expected higher capital and management requirements of Solvency II. Customers will therefore seek finality while others will need to recapitalise. “How you deal with this is an interesting question. It will be challenging to justify recapitalisation after carrying out the cost benefit analysis for some companies in this recessionary environment,” he said.

It is in this kind of area that Swiss Re really can offer something different for large corporate customers. Now that its capital base is sorted out, the focus is back on traditional underwriting business and profits are returning to normal, it does of course offer a healthy option in capacity terms.

But, the Group’s long term commitment to investment in research and innovative track record enables it to deliver solutions that many other companies simply do not have the resources or wherewithal to offer.

Given the high level of concerns among major insurance buyers about the market’s ability to meet their emerging risk needs this could help Mr. Kleiterp and his team to raise their profile and business in the European homeland without necessarily risking another roller coaster ride into the unknown that it and the market could well do without.