Feb. 18, 2009 2:49 PM CST
LONDON—Standard & Poor's Corp. lowered Swiss Reinsurance Co. Ltd.'s and its units' insurer financial strength and long-term counterparty credit ratings to A+ from AA- Wednesday, the day before Swiss Re is scheduled to release its fourth-quarter earnings.
S & P also said Swiss Re's ratings outlook is now stable.
Zurich-based Swiss Re earlier this month said it anticipated a 1 billion Swiss franc ($861 million) loss for 2008, and an expected 4 billion Swiss franc to 5 billion Swiss franc ($3.44 billion to $4.3 billion) erosion in its shareholder’s equity in the fourth quarter.
It also announced that Warren Buffett's Berkshire Hathaway Inc. would invest 3 billion Swiss francs ($2.58 billion) in Swiss Re in the form of convertible notes with a 12% interest rate.Berkshire Hathaway's option, which is convertible after three years into Swiss Re shares at a price of 25 Swiss francs ($21.50), could give Mr. Buffett about a 25% stake in the reinsurer.
Swiss Re also said it bought adverse development loss coverage for all property and casualty claims reserves for 2008 and prior years from Berkshire.
"These rating actions come in response to the much-greater-than-anticipated capital depletion seen at Swiss Re during 2008, the capital raising this has necessitated, and the potential adverse flow-on effects that Standard & Poor's believes this could have, particularly on the group's future earnings and financial flexibility," London-based S&P credit analyst Peter Grant said in a statement.
S&P said it expects the Berkshire Hathaway investment as well as the adverse development coverage to be sufficient to restore the group's capital adequacy "to a level in keeping with our 'AA' level target."
S&P said Swiss Re's capital adequacy will be susceptible to volatility in its investment portfolio, particularly its asset-backed securities. Swiss Re management's decision to build its asset-backed portfolio in 2007 was a "root cause" of the fall in the company's book equity, according to S&P.
Earlier this month, Swiss Re chief executive officer Jacques Aigrain resigned and was replaced by deputy chief executive officer Stefan Lippe.
In explaining its stable outlook, S&P said it expects "the group's underlying earnings on its core business to prove resilient to the financial challenges we anticipate will continue to confront the group over the medium term."
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1 comment:
Could this be a massive coup for Warren Buffet? The man definitely has the midas touch and if he can make it work, such a massive stake in Swiss Re could pay off nicely.
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