Swiss Re Sees Brighter Outlook
Amid Insurance Sector's Woes

LONDON -- After suffering one of the toughest years any insurer can remember, not many companies in the insurance industry are feeling strong enough to strut their stuff these days.

Swiss Re is an exception. New Chief Executive John Coomber, who took over the top job this month, is a soft-spoken former actuary. But he says he has no qualms about whether this is a good time for the world's second-largest reinsurer to be moving into its flamboyant new London offices, a 41-story cigar-shaped glass tower designed by Sir Norman Foster, popularly dubbed the Erotic Gherkin.

The building -- publicly mocked last year by Prince Charles as a "giant glass shaggy ink cap," a type of English mushroom -- stands on the site of a building destroyed in a 1992 Irish terrorist attack and, as of this spring, will house the Zurich-based group's global life and health division.

Mr. Coomber shrugs off the suggestion that the insurance industry has been humbled by its disastrous performance of the past two years and that this isn't the time for flashy corporate trophy buildings. "We like to be noticed," he says, asserting that despite the criticism sparked by the building's nontraditional design, it fits Swiss Re's corporate culture because it is an environmentally friendly building, making full use of natural light and ventilation.

Mr. Coomber, 53 years old, who previously ran Swiss Re's life and health business, was appointed the group's new CEO at a delicate time, succeeding Walter Kielholz when he accepted the chairman's post at Credit Suisse Group late last year. As has been the case for almost all insurers, the past two years haven't been easy for Swiss Re.

The group was hard hit by the combined force of terrorist attacks on the World Trade Center, spiraling claims for asbestos and other corporate liabilities, and the collapse of equity markets. Swiss Re has already set aside $3 billion in provisions to cover its World Trade Center losses and is still embroiled in a legal case against the World Trade Center leaseholder Silverstein Properties, which claims the attacks were two separate incidents and it should therefore be reimbursed twice.

Swiss Re also has taken the stock-market rout on the chin. In the first half of last year, it wrote down its equity portfolio by 917 million Swiss francs ($658.1 million or €627.5 million). Underlining the problems, the group's investment status took a symbolic knock in November, when it was downgraded by a notch from its prized triple-A credit rating.

Despite this catalog of woes, however, Swiss Re has weathered the past year relatively well when compared with the rest of the European reinsurance sector. Almost all of the sector, including its larger German rival Munich Re, were downgraded by credit-rating agencies last year. And Munich Re, which is burdened by substantial exposure to the German banking sector's problems, had a loss of €859 million in the third quarter, and has seen its share price fall more sharply than its Swiss rival's during the past year.

Swiss Re's other smaller rivals in the reinsurance sector (which effectively underwrites the risks of direct life and nonlife insurance companies or, in other words, insures the insurers) also have been severely wounded. Germany's Gerling, for example, has said it will stop writing new reinsurance business altogether, and Scor SA of France has sharply cut back its capacity and pulled out of the U.S. market altogether.

Having pushed Swiss Re shares down by more than 50% last year, investors are starting to warm to the company again. Deutsche Bank Asset Management portfolio manager Alex Teeder, for example, says that Swiss Re is his largest insurance holding in Europe. The reasons, he says, are that Swiss Re is the one of the best-positioned firms to take advantage of the current sharp rise in insurance rates.

"The reinsurance cycle is turning, and Swiss Re has a good mix of life and nonlife business," says Mr. Teeder, adding: "I like pure reinsurers, without the baggage of direct insurance business or banking."

Mr. Coomber is laying out a roadmap that will position the Swiss group to take advantage of the impending consolidation within the troubled industry. He says that the group will target further growth in the property-and-casualty insurance industry, where prices have been rising rapidly, rather than seeking to boost its life-insurance business.

"P&C is going to be our favorite destination, and we'll be moving more of our marginal dollars there," he says. "Although if we get good opportunities to grow life, we'll have to revisit our thinking."

Swiss Re is composed of three major divisions, property and casualty reinsurance, life and health reinsurance, and financial services. In the past year, the financial-services division has caused the most headaches for the group, resulting most noticeably in a 379 million Swiss franc loss in the first half of 2002. That loss was primarily due to exposure to the Lloyd's of London insurance market.

Nevertheless, investors have repeatedly expressed concern that the group could suffer major losses on its credit-derivatives portfolio, which consists of policies written to protect companies and insurers from losses in financial markets, particularly from corporate-bond defaults. For Mr. Teeder of Deutsche Bank Asset Management, for example, the lack of transparency within the financial-services division, and the difficulty of gauging its full exposure, is his main criticism of the group.

Mr. Coomber reiterated his reassurances that Swiss Re wasn't exposed to such losses, explaining that its credit-derivatives book avoids single-name counterparties, thereby avoiding the dangers of being hit hard by a corporate collapse of the Enron Corp. or WorldCom Inc. type. But he also acknowledged that the constant questioning about its exposure to credit derivatives had hurt the group and said that it was allowing that line of business to wind down. "This has been damaging to confidence and we no longer have a growing book," he said.

However, Mr. Coomber said that, under his mandate, Swiss Re would be looking to boost other aspects of its financial-services division.

Write to Charles Fleming at charles.fleming@wsj.com¹

Updated January 14, 2003