What does Roger Ferguson's departure signify?
The announcement that Roger Ferguson, Swiss Re’s head of Financial Services, would be departing to head up a major financial services firm comes as little surprise.
The division he was responsible for has now been “simplified”. In a move announced back in November 2007, Swiss Re announced that the entire Financial Services unit would disappear as a separate reporting line and be absorbed into the group.
The reinsurer was adamant this had nothing to do with a $1bn writedown as a result of two credit default swaps (CDSs).
Chief financial officer George Quinn insisted this decision was made for strategic reasons before the losses were known. “We see the changes as relatively subtle. We’re not trying to make something disappear.”
Is it a coincidence that the decision to effectively eliminate an entire unit occurred around the same time as Swiss Re’s credit crunch exposures became known? The timing, along with subsequent events, has certainly raised questions.
Ferguson’s new role is as chief executive of TIAA-CREF, a national financial services organisation with more than $435bn in combined assets under management. According to the company it is the leading provider of retirement services in the academic, research, medical and cultural fields. A challenging role for Ferguson – no one is suggesting he has left Swiss Re with his tail between his legs.
“It is easy to criticise the judgement made at the time but we have clearly made some poor choices
Things at Swiss Re did get tough towards the end though. Speaking in November following the company’s $1bn writedown announcement, Ferguson admitted the reinsurer had made some poor investment choices.
“It is easy to criticise the judgement made at the time but we have clearly made some poor choices,” he said. The head of the company’s Credit Solutions unit, responsible for the CDSs, was suspended.
Cue Warren Buffett. The legendary Oracle of Omaha and Berkshire Hathaway boss is renowned for striking opportunistic deals with companies when they are vulnerable.
In a very Buffett-style deal, the US reinsurance powerhouse with its deep pockets announced on 22 January it had bought 3% of the ailing Swiss reinsurer. Swiss Re also entered into a reinsurance contract with Berkshire.
Under the quota share arrangement, Berkshire Hathaway will assume a 20% share of all Swiss Re’s property and casualty business for the next five years.
With a quarter of its P&C business covered, Swiss Re suddenly has a lot of capital freed up. The reinsurer says it wants to use the extra cash to buyback even more of its shares.
“We have ceased writing new structured credit derivative transactions, putting the existing portfolio into run-off
Swiss Re’s chief executive officer, Jacques Aigrain, said at the time: “The additional capital efficiency as well as the downside protection will permit Swiss Re to retain flexibility in a softening property and casualty market. The arrangement also underlines the strength of our underwriting capabilities. It will allow us to increase capacity rapidly should pricing conditions improve. Furthermore, it will advance our efforts to manage earnings volatility – a key strategic priority.”
In March, a group of US shareholders brought a class action against Swiss Re. They allege that the reinsurer failed to disclose the two CDSs that exposed the company to financial risk. Swiss Re says it intends to defend itself rigorously.
Despite rumours that there may be more financial losses to come, Swiss Re is adamant that the worst is over. Reporting an annual profit of CHF4.2bn for 2007, the reinsurer was upbeat about its prospects.
“We took immediate action to strengthen the risk taking and supervision processes, and have ceased writing new structured credit derivative transactions, putting the existing portfolio into run-off,” explained Aigrain.
“Swiss Re’s very strong capitalisation, leading business position, financial flexibility and outstanding franchise are confirmed by superior financial strength ratings, which are among the highest in the industry and consequently allows us to pursue an active capital management approach.”