Thu Oct 29, 2009 9:54am GMT
By Jason Rhodes
ZURICH (Reuters) - Swiss Re's share price rebound gives Chief Executive Stefan Lippe a chance to raise capital, then use it to buy back a costly convertible investment from Warren Buffett and write new business.
Swiss Re (RUKN.VX) wrote down billions of Swiss francs on illiquid assets in the financial crisis and was forced to turn to Buffett's Berkshire Hathaway (BRKa.N) for support in February, triggering panic selling of the stock to record lows.
"If they chose to raise capital now it would provide an indication that they are back and in a position to pay back Warren Buffett," said A.M. Best analyst Vasilis Katsipis.
"It would improve their financial flexibility and performance. It's going to be a step in the right direction."
Lippe, chosen early this year as a boring but safe alternative to unpopular risk-taker Jacques Aigrain, has brought stability to the reinsurer by reducing risk, cutting losses and concentrating on the core reinsurance business.
Analysts wonder if veteran insurer Lippe also has the strategic vision to use the company's higher share price to deliver capital needed to buy back the convertibles and have the financial flexibility to chase new business more aggressively.
The shares plummeted to 11.88 francs in March shortly after Buffett pumped in 3 billion francs (1.8 billion pounds) at a hefty 12 percent coupon, with the option to convert into equity after three years that would hand Berkshire around 25 percent of Swiss Re.
At close on Tuesday, Swiss Re traded at 44.58 francs, almost double the Buffett conversion price of 25, meaning the reinsurer could even reduce share dilution by issuing equity and using the money to prevent Buffett from converting at the lower price.
"The shares are currently trading nearly four times higher than after the Berkshire deal and when you have luck like that, you should use it," said Kepler Capital Markets analyst Fabrizio Croce. "Nobody knows where the markets are going to go."
CLOSING THE GAP
A boost to capital could help Swiss Re, the world's second-biggest reinsurer, claw back ground on Munich Re (MUVGn.DE), which knocked it off the top spot in the crisis.
But Munich Re has since failed to turn the screw further on its closest rival, which under Lippe's stewardship is rebuilding the confidence of clients previously worried about Swiss Re's stability and its ability to pay up if hit by major claims.
For graphic showing performance of Swiss Re and Munich Re:
In the last two months, Swiss Re has said reinsurance prices are rising overall and that it is well positioned for the January 2010 renewals season, but will remain conservative on writing new business.
The company could write more new business with the backing of higher capital and a better credit rating, comfortable in the knowledge it can repay Buffett.
Reinsurers need to hold a large amount of capital to cover potential claims.
"The franchise of the company is still strong. Capital is the only constraint to regaining past glory," said Croce.
"They should do a capital increase and try to recover their AAA rating and write business," he said, adding the likely third-quarter strengthening of Swiss Re's capital base could deter the company from taking such bold action.
In March, shareholders approved the possibility of Swiss Re creating up to 180 million shares, equivalent to around 8 billion francs at Tuesday's closing price.
"They could issue up to 3 billion Swiss francs now and then think about a second similar step in a second phase," said Croce.
CLOSING THE DOOR ON BUFFETT
Swiss Re would need around 3.6 billion francs to repay Buffett, including a 20 percent repayment premium in a window between two and three years after Buffett made the investment.
Alternatively, the company could choose to pay a higher 40 percent repayment premium and clear the costly debt early in a show of strength to investors and rivals.
"The higher the share price goes, the more likely we will see an early redemption of the 3 billion Swiss francs Berkshire loan, potentially financed by a capital hike or similar measures," said Vontobel analyst Stefan Schuermann.
Ratings agency Standard and Poor's cut Swiss Re's credit rating, an indication of financial strength, to A+ from AA earlier this year. The Buffett investment and other factors enabled Swiss Re to recover its capital position to 4.5 billion francs in excess of that required for a AA rating by the end of the first half.
Hence some analysts see Swiss Re, once rated with the top AAA most often reserved for stable Western governments, sitting tight for the time being as the company's capital position likely improved further in the third quarter.
"We expect Swiss Re to repay Berkshire convertible in 2011 without the need to raise further capital," analysts at Goldman Sachs said in a note.
(Additional reporting by Paul Arnold, Editing by Sitaraman Shankar)
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