Lionel Laurent, 02.05.09, 01:40 PM EST
Annual loss could mark watershed moment for the reinsurer.
Shares of Swiss Re dived nearly 30.0% in Zurich on Thursday, after the reinsurance company said it would need to raise $4.3 billion in extra capital to plug a hole left by big investment write-downs and an annual loss of $861.3 million. Although Warren Buffett is providing a healthy $2.6 billion chunk of the required funds, not even his endorsement is likely to stop investors out for blood after this terrible year.
Swiss Re shares fell 28.1%, or 8.46 Swiss francs ($7.26), to 21.70 Swiss francs ($18.63), at the end of trading in Zurich on Thursday. After revealing 6.0 billion Swiss francs ($5.2 billion) in mark-to-market losses on credit-default swaps and other derivatives for the year, it's no surprise that investors' confidence suffered. There were already grumbles on Thursday morning's conference call asking management to resign.
"I would be surprised if the current management made it through the shareholders' meeting," said Ben Cohen, an analyst with Collins Stewart, who rated the stock "sell." But he said that with new management and a replenished capital base, this year might mark a turnaround point for the company.
Until then, things are not looking good for Swiss Re. Standard & Poor's said late Thursday that it had put the company on negative creditwatch, with a downgrade to its "AA" financial-strength rating now likely. "Both the magnitude of [Swiss Re's] additional write-downs and the resulting need to raise capital are outside Standard & Poor's expectations," said Peter Grant, an analyst for the ratings agency.
Swiss Re said its current surplus capital was at least 1.5-2.0 billion ($1.3-$1.7 billion) Swiss francs below the minimum to keep its "AA" financial-strength rating.
As for Warren Buffett, he's unlikely to be celebrating. Although Berkshire Hathaway, the Oracle of Omaha's holding company, agreed to lend Swiss Re $2.6 billion on favorable terms Thursday -- namely a 12.0% dividend and convertibility into stock after three years -- the stock has fallen nearly 74.0% since Buffett first bought a 3.0% stake in the company a year ago.
Buffett's official statement was typically contrarian. "We are delighted to have this opportunity to increase our investment in Swiss Re," he said. "I am very impressed by [chief executive] Jacques Aigrain and his management team." However, Buffett is unlikely to stick his neck out and back a losing horse when the next shareholders' meeting comes around -- his votes will instead be distributed on a pro rata basis with other investors'.
In addition to taking a voting stake in Swiss Re, Buffett promised to shoulder 20.0% of the company's property and casualty business until 2013. This helped Swiss Re handle hurricane season in 2008 slightly better than it otherwise would have. (See "Buffett Helps Swiss Re Weather Hurricane Season.")
Swiss Re spent most of 2008 buying back shares, but it suspended this program in November, after reporting a quarterly loss of 304 million Swiss francs ($262.1 million).
Buffett's love of contrarian value investing has not proven entirely successful lately. Berkshire Hathaway
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