Michael Bradford and Judy Greenwald
ZURICH, Switzerland—Swiss Reinsurance Co.’s expected 1 billion Swiss francs ($853 million) loss, significant erosion in shareholder equity and plans to raise up to 5 billion Swiss francs in capital have rating agencies pondering downgrades and analysts sorting out the damage to the reinsurance giant.
Swiss Re on Thursday announced the expected loss, along with an unexpected 4 billion Swiss francs to 5 billion Swiss francs ($3.41 billion to $4.27 billion) decrease in shareholder equity in the fourth quarter. The Zurich, Switzerland-based reinsurer also said Warren Buffett’s Berkshire Hathaway Inc., which already owns a stake in Swiss Re, will invest 3 billion Swiss francs ($2.59 billion) in the company in the form of convertible notes.
The reinsurer also plans to raise an additional 2 billion Swiss francs ($1.71 billion) in the market.
As added protection, Swiss Re plans to purchase from Berkshire a 5 billion Swiss francs loss reserve reinsurance cover for its property/casualty reserves.Despite these measures, Swiss Re’s stock dove nearly 30% on Thursday and continued its fall Friday.
Analysts contend that Swiss Re’s problems appear to be related to investments, with its reinsurance business remaining healthy. While the size of the reinsurers’ loss was not completely unexpected, there were other surprises, sources said.
“A surprise to me was how much shareholder equity declined in the fourth quarter,” said Tim Dawson, an analyst with Helvea S.A. in Geneva, Switzerland.Swiss Re’s capital position also fell surprisingly quickly, said Mr. Dawson. The company appeared to have plenty of excess capital in September, he noted, but by the end of the year had amounts below the level required to maintain an AA financial-strength rating. “That was the big shock.”
Georg Marti, an equity analyst with Zürcher Kantonalbank in Zurich, said the loss was not within many analysts’ expectations, but could have been even higher. “One possible scenario happened,” he said.
Swiss Re said in a statement that the loss was primarily due to mark-to-market losses in income and impairments to its investment portfolio. Those losses were partially offset by the group’s hedging program and a strong underwriting performance, Swiss Re said.
A.M. Best Co. placed Swiss Re’s A+ financial-strength rating under review with negative implications.
A final decision by Best on Swiss Re’s ratings will probably be made within the next three to four months, said Neal Enriquez, an analyst with Oldwick, New Jersey-based A.M. Best. “We still have to see their year-end numbers” that will be announced on Feb. 19, he said.Standard & Poor’s has placed Swiss Re’s AA financial-rating and long-term counterparty credit ratings under review with negative implications.
Swiss Re’s full results later this month will give the market some idea of how the reinsurance business has held up, analysts say.
“It seems the reinsurance business is doing well and the problems are only from the investment side,” Mr. Marti said. But that will become clearer later this month, he remarked.
“We only know the combined ratio and we do not know how it is composed,” Mr. Marti explained. “We have to look at it in a more detailed way. We will know in two weeks when they present their results.”
Swiss Re said its combined ratio is expected to be 97.4% on its property/casualty business in 2008.
“Their core, nonlife business is in pretty good shape,” said Mr. Dawson.
Jacques Aigrain, Swiss Re’s chief executive officer, said in the statement that the company’s property/casualty and life and health business is performing well. “We have taken steps to protect our capital strength to ensure the continued trust of our clients, and we continue to manage our business in a disciplined, conservative manner,” he said.
Among the steps Swiss Re has taken, it disbanded its financial markets activities and cut its dividend to a nominal amount as a way to preserve capital.
Questions remain as to how insurers will react to Swiss Re’s difficulties.
Collins Stewart Europe Ltd., a London-based analyst, said in an analysis that Swiss Re clients are likely to be wary.
“Whether Swiss Re is downgraded or not, we believe clients will approach its balance sheet with a degree of added caution,” Collins Stewart said. “These events will encourage the diversification of reinsurance risks, we believe.”
In a presentation to analysts and media earlier this week, James Schiro, Zurich Financial Services Group’s chief executive officer, would not comment directly on Swiss Re’s performance. “But we are encouraged,” he said of the reinsurer’s plans to add capital. “Our reinsurance receivables are in a much better position with a capital infusion at Swiss Re.”
Analysts claim Mr. Buffett worked a favorable deal for himself in injecting capital into Swiss Re.
“For Buffett, it is a very good deal,” said Mr. Marti. “It is not in the form of equity. It is a hybrid debt instrument, so if the stock goes down, it’s not his concern, but if the stock goes up, he will participate in the stock value appreciation. Furthermore, he will still obtain the interest on the debt. It’s a good deal for him unless the company goes bankrupt.”
“For Swiss Re, it is an expensive way to raise capital,” Mr. Marti said. “I do not think they had much choice. They were lucky to have an investor like Buffett who was willing to contribute capital.”
Mr. Buffett’s contribution gives him the option to convert his investment into equity, which could leave him with around a 25% stake in Swiss Re.
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