Mühlemann defends insurance business

Mühlemann was under heavy pressure to resign one of his posts Keystone Archive

The boss of Credit Suisse, Lukas Mühlemann, has defended the group's strategy of pursuing both banking and insurance activities.

Mühlemann made the comments in a newspaper interview two days after he announced that he would step down as chairman next year.

He has been facing increasing pressure to given up his dual mandate as chairman and chief executive, and will remain in the latter role.

Mühlemann’s decision to diversify into insurance has been heavily criticised since Credit Suisse was forced last month to pump SFr1.7 billion ($1.13 billion) into its Winterthur insurance subsidiary, which Mühlemann bought in 1997.

The money was needed to strengthen Winterthur’s financial base after sharp declines in the value of its equity investment portfolio.

In an interview with the “Tages-Anzeiger” newspaper, Mühlemann said life insurance was integrated into group asset management and considered a core part of activities. He also said non-life was a business that under normal conditions produced a good contribution to earnings.

CS said on Wednesday that the group was expecting a modest net operating loss in the second quarter as a result of additional lower equity valuations in the insurance business.

Bancassurance

Swiss financial expert, Marc Faber, told swissinfo that in theory a combined banking and insurance company – known as bancassurance – was a viable strategy, but that it seldom worked in practice.

“The problem is that most employees in large companies actually hate each other and don’t work very well together. Therefore there is very little synergy between a bank, and investment bank and an insurance company, he said.

“I think these entities would thrive better on their own than as part of a large conglomerate. I think that in the next few years you will see more and more divestitures of acquisitions that were carried out in the 1990s with the simple purpose of boosting share prices.

“As far as companies are concerned, they should focus on what they know and not diversify too much. There are very few successful conglomerates. Most of them fail sooner or later because it’s much too difficult to run different businesses,” he commented.

Ghosts return

Mühlemann’s decision to diversifying into insurance is just one that has come back to haunt him.

His purchase in 2000 of American securities firm, Donaldson Lufkin & Jenrette (DLJ) has turned sour amid the economic downturn. It cost Credit Suisse $12.4 billion at a time when the group’s book value was around $20 billion. Today, say many analysts, the whole of Credit Suisse is estimated to be worth less than that.

Mühlemann’s reputation has also taken a knock over Credit Suisse First Boston – last year he was forced to bring in new management, appointing John Mack to cut costs and try to repair the damage of legal and regulatory setbacks.

The bank also lost heavily in the aftermath of the Enron collapse and the crisis in Argentina.

Mühlemann had been criticised for not having taken his position as director of the failed Swissair Group seriously enough and for his role as director of the Argentine bank Banco General de Negocios, accused by the country’s justice authorities of having organised the flight of capital.

Supporters

Despite the problems, Mühlemann still has some heavyweight supporters. The Swiss financier, Martin Ebner, whose BZ Group is CS’s largest independent shareholder, said he was not convinced about Mühlemann’s decision to split the jobs of chairman and chief executive officer.

Unlike some investors of the troubled CS Group, where shares have lost about a third of their value, Ebner does not want to see Mühlemann go.

“Every manager makes mistakes. But all in all I think he has a better grasp of what banking and insurance is than most other people in Switzerland,” he commented to journalists.

Despite recent rumours, Ebner added that he doubted that CS was a takeover target now because of its share weakness. Over the past week, there has been speculation that Deutsche Bank was a potential buyer, although analysts said such a deal would not make much sense.

CS to sell US business?

The Financial Times reported on Friday that Credit Suisse was understood to be selling its United States property and casualty insurance arm.

The newspaper reported that it was believed CS hoped to raise $800 – $1.2 billion in such a deal.

It added that any funds raised could be further used to bolster the capital base of the Winterthur Insurance company.

swissinfo