Everything Warren Buffett: FORBES: Swiss Re Fails To Reassure

Tuesday, November 4, 2008

FORBES: Swiss Re Fails To Reassure

Lionel Laurent, 11.04.08, 5:29 AM ET
LONDON -

Swiss Re's surprise third-quarter loss of $259.3 million revealed Tuesday did not bode well, with the black month of October likely to have had an even starker impact on the reinsurance company's fourth-quarter results.

The third-quarter loss prompted the company to cancel its share buyback program, sending its shares down 5.7%, or 3.07 Swiss francs ($2.62), to 47.68 francs ($40.67), during morning trading in Zurich. Analysts had been hoping for a quarterly net gain in the neighborhood of 230 million Swiss francs ($196.1 million).

"This is only the third quarter," warned Stefan Schuermann, an analyst with Bank Vontobel, who downgraded Swiss Re (other-otc: SWCEF - news - people ) to "reduce," from "neutral," on Tuesday. "We have lots more negative market movements in the fourth quarter, which will leave a mark in results going forward."

Swiss Re's troubled investment portfolio was the main culprit, as attempts to hedge or simply unwind selected positions failed to prevent 572 million Swiss francs ($487.9 million) in investment write-downs and 289 million francs ($246.5 million) in mark-to-market losses on credit default swaps. The firm's initial response will be to hunker down and protect its balance sheet. It said it would suspend its 7.7 billion Swiss franc ($6.6 billion) share buyback--which was 51.7% completed at the end of October--until "some stability" returned to financial markets and its traditional business.

Although Swiss Re said its "good underwriting performance" was offset by market earthquakes in the third quarter, falling premiums and a higher payout ratio over the year also affected the company's insurance operations. The company said it now is predicting $315 million in claims from Hurricane Ike, higher than its $250 million estimate released earlier this year.

The so-called Oracle of Omaha, Warren Buffett, took a stake in Swiss Re back in January and agreed to shoulder 20.0% of its property and casualty insurance business. (See "Buffett Helps Swiss Re Weather Hurricane Season.")

Swiss Re's portfolio of structured products contains some 22.5 billion Swiss francs ($19.1 billion) worth of residential mortgage-backed securities, as of Sept. 30, and the company said it would increase, decrease or stop hedging of these products based on market conditions. As for its equity portfolio, Swiss Re said it had cut its exposure to stocks to 359 million Swiss francs ($306.2 million), from 2.5 million francs ($2.1 million), over the course of the year.