BLOOMBERG: Swiss Re Has Record Fourth-Quarter Loss on Writedowns (Update3)

Tuesday, December 8, 2009

BLOOMBERG: Swiss Re Has Record Fourth-Quarter Loss on Writedowns (Update3)

By Warren Giles

Feb. 19 (Bloomberg) -- 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 stock fell to its lowest ever.

The loss of 1.75 billion Swiss francs ($1.49 billion) compares with net income of 170 million francs in the same period a year earlier, according to a company statement released today. Zurich-based Swiss Re reported a full-year shortfall of 864 million francs, less than the 1 billion francs estimated Feb. 5, when it announced preliminary results.

While Swiss Re is reducing securities holdings, it still has 32.5 billion francs invested in assets that may be hurt by market declines, Rene Locher, an analyst at Bank Sal. Oppenheim said in a note to clients. Shares of Swiss Re, which turned to Warren Buffett�s Berkshire Hathaway Inc. for 3 billion francs of capital, have fallen 67 percent this year, making it the worst performer in the 35-member Bloomberg Europe 500 Insurance Index.

�Although we believe a lot of negative news is already reflected in the current share price, we believe it is too early to upgrade the stock,� Locher said. He has a negative rating on the shares.

Swiss Re also said its funding requirements will rise by $1.5 billion after Standard & Poor�s lowered the reinsurer�s debt rating yesterday. The company said it can meet those needs from existing reserves without resorting to a 2 billion-franc rights offering proposed two weeks ago.

Worsening Conditions

It may be an �error� not to raise additional capital �because conditions are worsening,� said Kepler Capital Management analyst Fabrizio Croce, who has a �hold� rating on the stock.

Swiss Re fell 88 centimes, or 5 percent, to 16.74 francs, a record low.

�This result is clearly disappointing,� Stefan Lippe, who replaced Jacques Aigrain as chief executive officer last week, 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 became the world�s biggest reinsurer after buying GE Insurance Solutions in 2005. Today, it has less than one quarter the market value of 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 help defend its credit rating, Swiss Re said it will cut its dividend to 10 centimes a share, from 4 francs. Berkshire Hathaway�s purchase of convertible bonds may give it a stake of more than 20 percent in Swiss Re.

�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.�

Swiss Re has been plagued by losses on credit default swaps, contracts sold to protect clients against declines in fixed- income securities, amid 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 data compiled by Bloomberg.

Aigrain ramped up Swiss Re�s sales and trading of securities in 2006 and 2007, when the reinsurance business was coping with stagnant premiums. While the strategy boosted profit in 2006, the credit crunch and rising bond defaults forced record writedowns in 2008.

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.

Demand for reinsurance is increasing, pushing up prices during January renewals, Quinn said in a Bloomberg Television interview today, adding that he expects �a continuing improvement throughout this year.� The company will announce revised targets for return on equity later this year, he said.

��Back to basics� does not mean back to the Stone Age,� Lippe told reporters. �It means we focus on what we are best at in reinsurance.�