Swiss Re 2007 Profit Drops Less Than Expected

By Douwe Miedema and Simon Challis

ZURICH/LONDON (Reuters) - Swiss Re (RUKN.VX), the world's biggest reinsurer, made better than expected 2007 net profit, as it escaped further subprime writedowns in the fourth quarter, and gave a confident earnings outlook.

It reported on Friday a smaller than expected 9 percent drop in net profit at 4.2 billion Swiss francs ($3.95 billion), slightly above the 4.0 billion average forecast in a Reuters poll of 15 analysts.

The group also raised slightly its return on equity (ROE) goal to 14 percent from 13 percent, while sticking to its 10 percent earnings per share growth.

It hiked its dividend by 18 percent to 4 francs per share, "a further sign of our confidence in the future earnings power of the firm," Swiss Re's Chief Financial Officer George Quinn told journalists.

"Swiss Re's 4Q 07 results have beaten expectations. There has been no material deterioration in the structured credit portfolio and no visible sign of contagion to other parts of the business," said KBW analyst William Hawkins in a note.

The news pushed Swiss Re shares up 4.4 percent to 83.5 francs at 1008 GMT, well ahead of the DJ STOXX index of insurers which was down 1.2 percent.

Its shares have fallen 18 percent since announcing a 1.2 billion Swiss franc ($1.10 billion) writedown on two credit default swaps in November. The company said it escaped further writedowns during 2007 but had booked modest further markdowns during the course of this year.

LOW CLAIMS, STRONG PROFITS

Reinsurers have posted bumper profits in 2007, helped by a combination of high prices and low hurricane claims. Rival Munich Re (MUVGn.DE) made a net profit of 3.94 billion euros ($5.95 billion).

Markets will remain tough in its core non-life reinsurance business, Swiss Re said on Friday, but underwriting profitability was strong, helped by the inclusion of acquisition GE Insurance Solutions for the first time.

The group's combined ratio of costs and claims as a percentage of premium income stood at 90.2 percent, better than the 93 percent average forecast in a Reuters poll. The lower the ratio, the higher underwriting profitability.

"Swiss Re expects property and casualty market conditions to remain challenging in the short term," the group said. "The January renewal season confirmed this trend."

But the reinsurance contract it entered into with Warren Buffett's Berkshire Hathaway should help insulate it from worsening market conditions, it said.

It expects the contract, in which Swiss Re passes on 20 percent of its overall non-life reinsurance risk portfolio, will increase its average return on equity by at least 0.5 percent a year until 2012, lifting earnings per share by at least 0.5 francs per year.

COMFORTABLE CREDIT EXPOSURE

Since Swiss Re stunned investors with its CDS writedown, becoming the sector's first major victim of the credit crisis, the market has wondered whether more would follow.

It estimated a further structured credit default swap mark-to-market loss of 240 million francs ($225.8 million) as of Feb. 20 but was relaxed about its further credit exposure.

"The markets are very volatile, so I can't reassure you as to where things are on March 31, but we feel very comfortable with the portfolio we have," Quinn said.

Swiss Re said it would vigorously defend a class action lawsuit filed in New York alleging that it made false and misleading statements in the period leading up to the CDS writedown last November.

The company has a total notional exposure of 19.3 billion francs to the monoline bond insurers, whose finances have been stretched to the limit by the subprime mortgage crisis.

Of that figure, 1.1 billion francs is related to residential mortgage backed securities it has reinsured, but Swiss Re said it had no material claims to date and has reserves of 340 million francs to pay any future claims.

"We still have the impression that the profit warning affected only a niche segment while we consider the core reinsurance business to be in excellent shape," WestLB analyst Thomas Noeck said in a note.

(Reporting by Simon Challis; Editing by David Cowell/Rory Channing)