Swiss Re Has Record Fourth-Quarter Loss on Writedowns (Update1)

Swiss Reinsurance Co., the world’s second-biggest reinsurer, posted a record fourth-quarter loss after a failed effort to boost earnings with sales and trading of securities.
The loss of 1.75 billion Swiss francs ($1.49 billion) compares with net income of 170 million francs reported a year earlier. The full-year shortfall was 864 million francs, Zurich- based Swiss Re said in a statement today, less than the 1 billion francs estimated Feb. 5, when the company announced preliminary results.
Swiss Re said its funding requirements will rise by $1.5 billion after Standard & Poor’s lowered its debt rating yesterday. The company turned to Warren Buffett’s Berkshire Hathaway Inc. this month for 3 billion francs of capital and replaced Chief Executive Officer Jacques Aigrain, whose strategy of trading securities led to the record losses.
“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 added 32 centimes, or 1.8 percent, to 17.94 francs at 9:54 a.m. The stock has lost 64 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.

Buffett’s Stake
S&P cut Swiss Re’s credit and financial-strength ratings to A+ from AA- after the market close yesterday, citing “greater- than-anticipated capital depletion.”
The company’s losses “are symptomatic of Swiss Re’s greater tolerance for financial risk than its peers,” S&P said.
To defend its credit rating, Swiss Re said it will cut its dividend to 10 centimes a share and may seek to raise 2 billion francs on top of the investment by Buffett. Berkshire Hathaway’s purchase of convertible bonds may give it a stake of more than 20 percent in Swiss Re.
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.
The company had 5.89 billion francs of writedowns in 2008, including 2 billion francs in structured credit default swaps and 3.2 billion francs in discontinued trading activities.

Insurers’ Losses
Insurers worldwide have posted more than $166 billion in losses and writedowns tied to the collapse of the mortgage market according to Bloomberg data.
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.
“We would expect it will take us a year to two to demonstrate that the steps we’ve taken will be sufficient,” Chief Financial Officer George Quinn told reporters on a conference call. “S&P acknowledges that once we complete the capital plan we will hold capital in the AA range.”
The firm will announced revised targets for return on equity later this year, Quinn said.
Demand for reinsurance is increasing, pushing up prices during January renewals, said Quinn in a Bloomberg Television interview today, adding that he expects “a continuing improvement throughout this year.”


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