Swiss Re Gets $2.6 Billion From Buffett After Loss (Update4)

By Warren Giles and Kevin Crowley
Bloomberg News
February 5, 2009


Feb. 5 (Bloomberg) -- Swiss Reinsurance Co., the world's second-biggest reinsurer, turned to Warren Buffett's Berkshire Hathaway Inc. for 3 billion Swiss francs ($2.6 billion) to shore up capital depleted by record losses.

Swiss Re fell as much as 27 percent, the most since at least 1990, after posting a 2008 loss of about 1 billion francs and announcing plans to cut the dividend. The Zurich-based company also will disband its financial-markets unit and may seek more capital. Berkshire's investment may give it a stake of more than 20 percent as Swiss Re struggles to keep its credit rating.

"Both the magnitude of the additional writedowns and the resulting need to raise capital are outside of our expectations," Standard & Poor's Ratings Services said today in a statement following Swiss Re's announcement. The ratings company said it may lower Swiss Re's long-term credit ratings from AA-. "We currently do not expect to lower the ratings by more than one notch."

Chief Executive Officer Jacques Aigrain is abandoning his attempt to increase profit by trading securities such as credit- default swaps. The foray led to writedowns of 6 billion francs last year, depleted shareholder equity and took two-thirds off the insurer's market value in 2008. Swiss Re became the world's biggest reinsurer after buying GE Insurance Solutions in 2005 and now has only one third the market value of Munich Re.

While the 2008 results are disappointing, Buffett's decision to increase his investment in Swiss Re "is a testament to the strength of our franchise," Aigrain said. "The contacts were extremely recent, and the solutions were developed in an extremely short time-frame, leading to a signing of our agreement during the night," Aigrain told reporters today.

Worst Performer

Swiss Re was down 26 percent at 22.44 francs as of 12:30 p.m. in Zurich, valuing the company at 7.9 billion francs. The stock has plunged 55 percent in 2009, making it the worst performer in the 35-member Bloomberg Europe 500 Insurance Index as investors anticipated the writedowns.

Credit-default swaps on Swiss Re fell 59.5 basis points to 468, the lowest since Nov. 17, according to CMA Datavision prices at 11:45 a.m. in London. A decline in credit-default swaps, financial instruments used to hedge against losses or speculate on a company's creditworthiness, indicates an improvement in the perception of credit quality.

While Swiss Re said it has more capital than regulators require, it needed at least 1.5 billion francs on Dec. 31 to keep its credit rating. The company plans to get approval to sell as much as 2 billion francs of additional stock, it said.

Swiss Re's shareholder equity was less than 20 billion francs as of Dec. 31, down from almost 32 billion francs at the end of 2007, it said. Still, the company said it doesn't expect to need government assistance, Aigrain said.

No Contact

"We have never been contacted, nor contacted the national bank or government," he told reporters.

Berkshire Hathaway's latest investment comes in the form of convertible notes paying a 12 percent coupon, Swiss Re said. Berkshire can convert them to Swiss Re shares after three years at a price of 25 francs apiece or continue to receive "perpetual" payments of 12 percent a year.

"The terms of the Berkshire capital raising indicate a cautious view on the potential for other risks in the balance sheet," said Tim Dawson, an analyst at Helvea in Geneva who has a "neutral" rating on the company. "Clearly there were market concerns."

Buffett bought 3 percent of Swiss Re in January 2008, ceding 20 percent of its property and casualty business to Berkshire Hathaway over five years to free up capital.

'Very Impressed'

"I'm very impressed by Jacques Aigrain and his management team," Buffett, 78, said in the statement.

General Electric Co., Goldman Sachs Group Inc. and Harley- Davidson Inc. are among the companies that have gone to Buffett in the last year after the global credit crunch made it more difficult to get funding. The Omaha, Nebraska-based billionaire also is the largest shareholder in American Express Co.

Buffett's investment vehicle bought $5 billion of preferred stock in Goldman Sachs in September. It pays a 10 percent divided and can be converted to common stock at any time at a 10 percent premium. The company also received warrants to buy $5 billion of common stock at any time until 2013. Buffett gets 15 percent interest on $300 million of notes sold by Harley Davidson.

Swiss Re has been plagued by losses on contracts sold to protect clients against declines in fixed-income securities after the worst U.S. housing market since the Great Depression sparked a global credit crunch.

'Derisking'

The company is now disbanding its financial markets unit as part of the "derisking" strategy, Swiss Re said. Remaining assets will be split between the asset-management division and a new "legacy" unit to hold the company's credit-default swaps, which provide guarantees against corporate bond defaults.

Aigrain ramped up Swiss Re's sales and trading of securities in 2006 and 2007, when the reinsurance business was trying to cope with stagnant premiums. While the strategy boosted profit in 2006, the credit crunch and rising bond defaults forced record writedowns in 2008. About a third of Swiss Re's markdowns last year were tied to credit default swaps, it said.

"Our business is reinsurance risk in all and any form, but only reinsurance risk," Aigrain said on the conference call. "All activities not strictly related to that are in runoff."

Job Cuts

The financial markets unit cut 40 jobs worldwide between the end of 2007 and Oct. 31, 2008, Swiss Re said. It also eliminated 80 technology jobs.

"You can never rule out job cuts," Chief Financial Officer George Quinn said on the conference call. "The firm has significant scope to improve its cost base."

Swiss Re is reviewing its target of 14 percent return on equity, Quinn said. The revisions will "take account of improvements in reinsurance and expected lower returns on capital," he said.

The Swiss Exchange said yesterday it is probing what Swiss Re told analysts, investors and the press about its risks. Chairman Peter Forstmoser said in July 2008 he didn't expect additional writedowns at Swiss Re, according to Handelszeitung.

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