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Buffett invests in Swiss Re as insurers hurt
2009-02-05
ZURICH - U.S. investor Warren Buffett shored up weakened world No. 2 reinsurer Swiss Re with a 3 billion Swiss franc ($2.6 billion) investment on Thursday as the Swiss group wrote down twice that amount in toxic assets. A second Swiss insurer, Zurich Financial Services, reported a 23 percent fall in business operating profit for 2008, missing forecasts as it cut its dividend and announced more cost cuts, Reuters reported. Swiss Re made the surprise investment announcement along with a 2008 net loss of around 1 billion francs. It also said it would disband its financial markets activities and consider further equity raising of up to 2 billion francs.. Ratings agency Standard & Poor's (S&P) said it was putting Swiss Re's AA- rating on credit watch with negative implications. "Both the magnitude of the additional writedowns and the resulting need to raise capital are outside of our expectations," said S&P credit analyst Peter Grant. Swiss Re's shares tumbled 26 percent by 1304 GMT (8:04 a.m. EST) to 22.30 Swiss francs, after touching a 16-year low of 22.32. The stock had already lost 40 percent in 2009 as investors worried about a lack of transparency on writedowns. Swiss Re shares have fallen by more than half so far this year, while shares in the world's biggest reinsurer Munich Re have fallen by less than 5 percent and those of No. 4 player Hannover Re have risen by more than a fifth. Zurich dropped 4.1 percent, compared with a 2.1 percent weaker European insurance sector. "Zurich is definitely a contrast to Swiss Re. Both are in a difficult environment, but Zurich has done the better job to date," said Vontobel analyst Stefan Schuermann. The news of Swiss Re's loss comes just a day after U.S. insurer Prudential Financial Inc posted a $1.64 billion quarterly loss hurt by investment writedowns. BUFFETT BARGAINS? Buffett's move through Berkshire Hathaway Inc is the latest in a series of investments he has made in crisis-hit companies, including General Electric Co and Goldman Sachs Group Inc. Conversion of Berkshire Hathaway's investment in what the group called a "perpetual capital instrument" would take its stake in Swiss Re to over 20 percent, the reinsurer's Chief Financial Officer George Quinn said. The terms of the conversion were set at 25 Swiss francs per share after three years, with a price adjustment if there is a rights issue of more than 2 billion francs within six months. The instruments have a coupon of 12 percent and the face value represents a hefty discount on Wednesday's Swiss Re closing price of 30.04 Swiss francs. The deal extends a relationship struck between Buffett and Swiss Re just over a year ago, when the billionaire investor's fund took a 3 percent stake in the insurer and 20 percent of its property and casualty reinsurance business. Swiss Re said demand for reinsurance has increased, as many clients are seeking protection to offset the erosion of their capital, and it expects to report an increase in rates of about 2 percent in 2008 and the reinsurance premium cycle to harden further. But it sought additional capital and said its shareholders' equity at the end of 2008 was estimated at between 19 billion to 20 billion francs, below the level needed for an AA rating. BUFFERS And investors are still wondering whether Swiss Re will yet need more capital. "What we've tried to do is establish what we believe to be a reasonable buffer," said Quinn. "There can be no assurance that this would be sufficient in every circumstance. "If we see either further very significant changes in asset values or, for example, a large natural catastrophe, that may deplete Swiss Re capital," CFO Quinn said. A 5 billion franc capital injection would take Swiss Re's shareholders' equity to a similar level as at the end of the third quarter, 24 billion francs. This buffer proved insufficient in the fourth quarter for the company to retain its AA rating, as asset values fell more than Swiss Re anticipated. Chief Executive Officer Jacques Aigrain said Swiss Re had never approached the Swiss government or Swiss National Bank over the possibility of a bailout and it preferred to fund itself privately. RING-FENCING TOXIC ASSETS Swiss Re said it would reorganize its financial markets activities into two new businesses, including a legacy unit which will manage structured credit default swaps (SDC) and other toxic assets after the 6 billion franc writedown for the full year. The company, which had been expected to announce full-year results on February 19, slashed its dividend to 0.10 francs per share. Zurich also cut its dividend to 11 Swiss francs ($9.62) per share from 15 francs for 2007 and announced a further $200 million in cost cuts. Zurich's general insurance gross written premiums rose 4 percent to $37.2 billion. The company's combined ratio, which measures costs and claims as a percentage of premium income, rose to 98.1 percent at end-2008, from 95.6 percent a year earlier. The lower the benchmark, the higher Zurich's underwriting profitability. (Additional reporting by Paul Arnold; Editing by Erica Billingham, Andrew Callus and David Cowell) ($1=1.143 Swiss Franc)
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