Swiss Re To Plug Losses With $2.6 Billion From Buffett

Swiss Re Group said today that to preserve its "AA" rating it is beefing up its capital with an infusion of three billion Swiss francs--$2.6 billion at current exchange rates--from billionaire investor Warren Buffett, after sustaining an estimated 2008 loss of one billion Swiss franc, translating into $860 million.

The Zurich, Switzerland-based company said its arrangements to secure capital from Mr. Buffett's Berkshire Hathaway Inc. are subject to shareholder approval, and that the firm will consider raising an additional two billion Swiss francs ($1.7 billion), subject to market conditions, for a total of five billion Swiss francs ($4.3 billion), counting Mr. Buffet's infusion.

In reaction, Standard & Poor's said it was putting the firm's ratings on CreditWatch with negative implications. It said the magnitude of additional write-downs, much of it on credit default swaps, by the company "and the resulting need to raise capital are outside of our expectations."

Swiss Re said the investment from Berkshire Hathaway is expected to be in the form of a convertible perpetual capital instrument issued by Swiss Re, with a 12 percent coupon. At Berkshire Hathaway's option, it will be convertible after three years into Swiss Re shares, with a price of 25 Swiss francs ($21.48) per share (subject to anti-dilution adjustments).

The reinsurer said it intends to ask the General Assembly for authorization for a rights offering to existing shareholders of up to two billion Swiss francs ($1.7 billion), subject to market conditions.

The company has also agreed, subject to regulatory approval, to enter into an adverse development cover with Berkshire Hathaway on Swiss Re's total p-c reserves. The contract will provide total coverage of five billion Swiss francs ($4.3 billion).

Swiss Re also said there will be a nominal reduction in its dividend, and that it is "de-risking" its portfolio.

The firm's surplus regulatory capital as of Dec. 31, 2008 was between 1.5 billion Swiss francs ($1.3 billion) and two billion Swiss francs ($1.7 billion) below the level required to maintain its current "AA" rating.

Jacques Aigrain, Swiss Re's chief executive officer, said in a statement that the firm is "disappointed with our overall results in 2008, but our core business--property and casualty and life and health--is performing well."

Mr. Buffett said his firm is "delighted to have this opportunity to increase our investment in Swiss Re. I am very impressed by Jacques Aigrain and his management team."

The company listed shareholders' equity as of Dec. 31, 2008 as between 19 billion Swiss francs ($16.3 billion) and 20 billion Swiss francs ($17.2 billion) down from 32 billion Swiss francs ($27.5 billion) in 2007.

Swiss Re said it is "de-risking" its portfolio. Mr. Aigrain noted the company "has taken steps to protect our capital strength to ensure the continued trust of our clients, and we continue to manage our business in a disciplined, conservative manner. Warren Buffett's agreement to invest in Swiss Re is a testament to the strength of our franchise."

The preliminary one billion Swiss franc loss estimate was attributed to negative investment results, primarily due to mark-to-market losses seen in income and impairments on its investment portfolio. The company said its losses were partly counterbalanced by a hedging program.

Swiss Re said a decline in shareholders' equity in the fourth quarter are primarily due to unrealized losses on investments and the impact of exchange rate fluctuations.

Nevertheless, management said the global reinsurer's underlying operating performance is "excellent due to strong client solution focus and disciplined underwriting," and, said the firm, is ready for an increased client demand it sees for reinsurance.

The company reported its p-c operations maintained a profitable combined ratio for 2008, which it expects to come in at 97.4 (95.6 excluding an "unwind of discount").

It reported that life and health business remains strong, with a benefit ratio for the full year of approximately 85.5 percent.

Swiss Re reported increased demand for reinsurance, stating that many clients are seeking protection to offset the erosion of their capital.

The firm expects to report an increase in rates of around 2 percent, leading to a volume increase of around 6 percent, at constant foreign exchange rates, with the reinsurance premium cycle continuing to harden.

As part of an overall de-risking, Swiss Re said financial markets activities have been disbanded, and the remaining activities have been reorganized into two distinct units.

The company said its Asset Management unit is responsible for managing the assets generated through the (re)insurance activities, and is linked with Products Underwriting and Client Markets to provide insurance-related solutions to clients.

Using U.S. Generally Accepted Accounting Procedures, return on asset management investments for the full year is estimated to be around 5 percent, while the total return is a small positive, the company said.

Swiss Re said its Legacy unit manages products no longer offered by the group. These include the structured credit default swaps, portfolio credit default swaps, financial guarantee reinsurance, and the former trading businesses of financial markets. These businesses produced a mark-to-market loss for the full year of approximately six billion Swiss francs ($5.2 billion), including mark-to-market losses of two billion Swiss francs ($1.7 billion) for structured credit default swaps.