New York City

Swiss Re started the year in a tough spot, having reported a big loss for 2008 thanks in large part to ill-advised credit default swaps, and without enough capital on hand to maintain its “AA” rating from Standard & Poor's.

Yet the firm has managed a rapid change in fortunes, thanks to a substantial capital injection, a decisive shift in its asset management strategy and a continuing emphasis on sound reinsurance underwriting, CEO Stefan Lippe stressed during an exclusive interview last week in his Manhattan office.

Mr. Lippe became CEO in February, right in the middle of a flood of bad financial news for Swiss Re. But he is no stranger to the company, having served in various capacities for 25 years, and he hit the ground running.

Giving him a head start was the fact that Swiss Re, a week before his appointment, had announced a deal to inject additional capital of some three billion Swiss francs from Berkshire Hathaway, in what Mr. Lippe described as “bridge financing” from Berkshire Hathaway in the form of a convertible capital instrument.

“We're living in a time when the economic power of a company is critically important,” he said. “We had to make sure our financial position did not negatively impact our client franchise, and with this infusion of Berkshire capital, it did not.”

Mr. Lippe, who has spent most of his career on the underwriting side of the business, noted that Swiss Re has been holding its own on its bread-and-butter reinsurance operations, but that the company had to “de-risk” its asset portfolio through a combination of sales and hedging.

Swiss Re was one of those dealing in credit default swaps, which got so many other financial players into trouble–but has now relegated that toxic product line to its “Legacy” unit, which handles discontinued products.

The company has also maintained its focus on sound underwriting and has set new, tougher standards in terms of operating profitability, according to Mr. Lippe.

For 2008, Swiss Re posted a 97.9 combined ratio, breaking the traditional mark for profitable underwriting.

However, Mr. Lippe emphasized that he is much more “comfortable” and “confident” about the company's overall success after recording a far better combined ratio of 89.4 for the first half of this year, given the modest investment returns expected in this low interest rate climate.

“The key question today is how much do you have to be below 100 on your combined ratio in an environment with little yield on your investment portfolio,” he noted. “People in this business have to change their DNA and no longer be fixated on that magic number of 100, when in fact you might have to come in much lower than that to be successful.”

Mr. Lippe said his target is a combined ratio of 92 to 95, noting, “I would not be too happy with it too close to 100, even if it comes in below that.”

With that stiffer benchmark in mind, Swiss Re has rededicated itself to underwriting discipline, according to Mr. Lippe, who said his company is fully prepared to walk away from business it cannot write to its new standard.

For example, he noted that the reinsurer has in fact cut back substantially on what it considers to be underpriced casualty business. “The fall in prices on casualty is not supported by claims experience,” he explained.

That's a critical element in Swiss Re's strategy, he added–with the company's combined ratio on property business coming in at a stellar 70, while casualty business remains “a little above 100? for the first half of 2009.

It helps that the market has “firmed, not hardened” to the point where Swiss Re can get the prices it requires on the property business it wants to write, according to Mr. Lippe. “We're getting more top-line growth and better prices,” he added.

But even though he said he is “happy” with U.S. property rates these days, “you have to be very careful about what you are writing and where, and for what price,” he warned–particularly in catastrophe-prone areas.

Mr. Lippe expressed some frustration with the number of “systemic” risks he has to deal with–including differences in accounting standards among his various markets.

That is one reason he decided to join up with his fellow CEOs earlier this month in Monte Carlo to announce the formation of a Global Reinsurance Forum that includes the heads of Gen Re, Hannover Re, Lloyd's, Munich Re, Partner Re, SCOR, XL Capital and other giants of the industry.

The new organization is “lean,” noted Mr. Lippe, with the rotating chair (now taken by Denis Kessler, CEO of SCOR) handling “all the red tape” and administrative duties, since there is no executive director or full-time staff.

“This is not in any way a negative comment on other reinsurance associations” in the United States, Bermuda and Europe, he said, “but there are so many cross-border issues that we can address via this new organization.”

Asked about concerns over a possible “cartel” effect, with the CEOs of so many major reinsurers meeting regularly and cooperating on global initiatives, Mr. Lippe said the group's charter forbids any discussion of rates, coverage or other anti-competitive actions.

He said the organization was instead formed to address regulatory, accounting and other mutual concerns to help eliminate unnecessary costs from the market, which benefits buyers.

He also noted that similar concerns could apply to any such gathering of industry executives–including the most famous, the recently completed Rendez-Vous in Monte Carlo–”yet people know what they can and cannot do, and act accordingly.”

Looking ahead, Mr. Lippe expects a continued firming of property prices for Jan. 1 renewals, but said the casualty market will “remain challenging” for the foreseeable future.

On the investment side, he said he does not expect returns to keep steadily rising, but instead anticipates “a quarter or two where we will have a roller coaster.”

This, he believes, will put a strain on the balance sheets of “some insurers on the brink,” which will prompt additional reinsurance purchases to bolster primary company balance sheets–further boosting Swiss Re's top- and bottom lines, since prices will rise with renewed demand.

A “second phase” will then emerge, he predicted, in which “all that money sitting on the sidelines will come into the market once the economy is stabilized for certain,” generating greater consolidation in the industry.

Special Reports /

Swiss Re Manages Quick Turnaround Under New CEO Despite Tough Economy

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