4 THE DISCREET CHARM OF HIDDEN RESERVES: HOW SWISS RE SURVIVED THE GREAT DEPRESSION Tobias Straumann
The recent Great Recession was surely one of the most severe economic crises since the end of the Second World War, but the Great Depression of the 1930s still stands out as the greatest economic catastrophe of the last hundred years.1 However, seen from the Zurich headquarters of Swiss Re (SR), one of the leading global reinsurance companies, the exact opposite is true. The Great Depression was certainly a severe test, but it was in 2008 that SR had to report the first annual net loss in 140 years. In search for new capital, SR had to raise equity and to turn to Warren Buffet, a major competitor in the market, in order to replenish its capital. Furthermore, in February and May 2009 the chief executive and the chairman of the board of directors respectively resigned.2 The Great Recession, not the Great Depression, proved to be the most severe crisis in the company’s history. This chapter tries to show why and how SR was able to maintain its position in the midst of a collapsing global economy during the 1930s. My conclusions are based on the minutes of the board and the internal figures that were available to directors and senior managers at the time. The main result of this investigation is that SR’s survival can be explained neither by short-term actions nor by strategic decisions taken by the board in the course of the crisis. The effects of short-term actions were too limited to make a difference, and there were practically no strategic decisions aimed at reorienting the business model in order to mitigate the losses. It was rather the high level of hidden reserves accumulated prior to the crisis which saved SR. Without them, the company would have become insolvent in 1931. Conversely, if during the recent Great Recession SR had disposed of the same amount of hidden reserves, the net gains would have been quite high, and the chairman and the chief executive would still be in office. This insight is not entirely new, of course. We know from other studies in insurance history that hidden reserves repeatedly played a crucial role in cushioning financial and economic shocks. Clive Trebilcock, for example, mentions in his seminal study of PhoenixAssurance that ‘[s]trong expansion of the “hidden reserve” in the 1920s held the line against the worst the markets could throw – 55 –
