Forbes: Buffett scores on Swiss re

Vidya Ram , 02.29.08, 1:00 PM ET


LONDON-The Oracle of Omaha seems to have made another sound investment. Careful hedging helped Swiss Re, the world's largest reinsurer, which Warren Buffett bought a 3.0% stake in last month, report far lower-than-expected write-downs in 2007 and early 2008, suggesting that fears about the company have been overplayed.

As record losses from Americal International Group sent stocks in the European insurance sector down an average of 2.8%, Swiss Re's shares soared 3.6%, or 2.85 Swiss francs ($3.54), to 82.80 Swiss francs ($80.01), in Zurich late on Friday, after it released its annual earnings.

"There has been no material deterioration in the structured credit portfolio and no visible sign of contagion to other parts of the business," Keefe, Bruyette and Woods analyst William Hawkins said.

Since Swiss Re (other-otc: SWCEF - news - people ) wrote down 1.2 billion Swiss francs ($1.1 billion) on two credit defaul swaps it had written last November, its shares have plummeted 18.0% as investors feared that other bad news could follow.

However on Friday the company, which insures the risks taken on by the world's leading insurance companies, said that it had incurred a further mark-to-market loss of just 240 million Swiss francs ($229.5 million) on structured credit default swaps as of February 20.

Analysts had been expecting additional write-downs of between 500 million euros ($478.4 million), and 2.5 billion euros ($2.4 billion) for 2007 alone, so the write-down which included the turbulent weeks since the start of 2008 was very encouraging.

The smaller-than-expected write-down allowed Swiss Re to post annual profits of 4.2 billion Swiss francs ($4.0 billion), in 2007, a 9.0% decline from 2006, but still better than the 4.0 billion Swiss francs ($3.8 billion) that analysts had been expecting.

Swiss Re's combined ratio, which measures costs and claims against the company's income from premiums, rose to 90.2%, from 90.4%, a year earlier, and was better than expectations of 93.1%.

On Monday, Munich Re (other-otc: MURGF - news - people ), the world's second largest reinsurer also beat analyst expectations with its annual and fourth-quarter results after taking just a 16 million euro ($15.3 million) mark-to-market loss in the final quarter of 2007. (See: " Munich Re Reassures")

So far banks and financial institutions across the world have been forced to write-down over $100 billion on assets that have been hit by the crisis in the U.S. mortgage market, and analysts at UBS estimate that further write-downs could amount to $203 billion.

Adding to the woes of the financial sector is the possibility of legal action. On Thursday New York-based law firm Coughlin Stoia Geller & Robbins said it had filed a class action law suit against Swiss Re in New York on behalf of an unnamed institutional investor in for making "false and misleading" statements about its financial conditions, and failing to disclose that it had written the two credit default swaps that "exposed the company to great financial risk."

Reuters contributed to this report.