By Warren Giles
Feb. 19 (Bloomberg) -- Swiss Reinsurance Co., the world’s second-biggest reinsurer, posted a fourth-quarter loss of 1.75 billion Swiss francs ($1.49 billion) after a failed effort to boost earnings with sales and trading of securities.
The loss compares with net income of 170 million francs reported a year earlier. The full-year loss was 864 million francs, Zurich-based Swiss Re said in a statement today.
Swiss Re said its funding requirements will rise by $1.5 billion after Standard & Poor’s lowered its debt rating yesterday following the losses. The company this month turned to Warren Buffett’s Berkshire Hathaway Inc. for 3 billion francs of capital and parted with Chief Executive Officer Jacques Aigrain, whose strategy of trading securities led to the record losses.
“The capital measures will surely have a massive dilutive effect,” Thomas Noack, an analyst at WestLB Equity Markets in Dusseldorf, wrote in a Feb. 18 note to investors. The loss is “surely driven by huge unrealized mark-to-market movements.” He has a “neutral” rating on the stock.
Swiss Re has plunged 65 percent this year, making it the worst performer in the 35-member Bloomberg Europe 500 Insurance Index. Swiss Re became the world’s biggest reinsurer after buying GE Insurance Solutions in 2005 and now has less than one quarter of the market value of market leader Munich Re.
S&P’s cut Swiss Re’s credit and financial-strength ratings to A+ from AA- after the market close yesterday, citing “greater-than-anticipated capital depletion.”
Berkshire Hathaway’s purchase of convertible bonds may give it a stake of more than 20 percent in Swiss Re, which said Feb. 5 it may still need additional capital.
“This result is clearly disappointing,” Stefan Lippe, who replaced Aigrain as CEO, said in the statement. “We have already taken extensive measures to de-risk the investment portfolio and to further protect the long-term financial strength of the company.”
Swiss Re has been plagued by losses on credit default swaps, 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.
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 were tied to credit default swaps, it said.
The company is disbanding its financial markets unit as part of its “derisking” strategy. Remaining assets will be split between the asset-management division and a new “legacy” unit that will hold the company’s credit-default swaps, which provide guarantees against corporate bond defaults.
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