Swiss Re on Thursday turned to Warren Buffett, the legendary US investor, for fresh funding and cut its dividend to a “nominal” amount in an effort to retain its investment grade credit rating.
The Swiss reinsurer also scrapped its financial markets activities following large writedowns on structured credit default contracts and reported a SFr1bn ($860m) annual loss.
The results, which were released early following heavy share price falls in recent days on rumours of losses and refinancing needs, confirmed analysts’ worst fears. Swiss Re shares plunged 15 per cent to SFr25.76 in early afternoon Zurich trading.
More than half of the SFr5bn Swiss Re may raise – SFr3bn – will come from Berkshire Hathaway, Warren Buffett’s investment group, which is already a big shareholder. Mr Buffett could eventually own more than 20 per cent of the Swiss reinsurer.
The decision to raise capital followed Swiss Re’s admission that, at year-end, it was SFr1.5bn-SFr2bn below the level required to maintain its current AA credit rating. To preserve capital, the group intends to cut its dividend to a nominal amount.
Shareholders’ equity fell to SFr19bn-SFr20bn at year-end following unrealised losses on investments in the fourth quarter and exchange rate factors.
Swiss Re’s problems contrasted with the relative health of its arch rival Munich Re. The German group this week said that although 2008 profits had slumped to €1.5bn from €3.9bn, it would maintain its €5.50 dividend.
Berkshire’s holding, which is subject to Swiss Re shareholders’ approval, will probably be via a perpetual note paying 12 per cent. The US investor will have the option in three years to convert into Swiss Re shares at SFr25.
“We’ve seen a much, much larger movement in asset values in the fourth quarter than anyone anticipated”, said George Quinn, chief financial officer.
Swiss Re, which had claimed to have taken extraordinary steps to protect the value of its near SFr200bn investment portfolio, said it would continue reducing risk while raising new funds.
Apart from the injection from Berkshire, the group said it would raise further equity of up to SFr2bn, subject to market conditions.
“We are disappointed with our overall results in 2008, but our core business – property and Casualty and life and health – are performing well”, said Jacques Aigrain, chief executive.
The comments showed how deeply the group suffered in its financial services division, which has already had to write down about SFr2.7bn since late 2007 on two disastrous structured credit default swaps for a client.
In a surprise move, the group announced a full scale retreat from its former strategy of moving increasingly into sophisticated, and sometimes esoteric, financial insurance and trading.
Swiss Re will disband its financial markets activities, with remaining businesses being reorganised into asset management and a “bad bank” legacy business, which will hold the structured CDS and other troubled assets. Swiss Re said the legacy unit booked a SFr6bn writedown for the year, of which SFr2bn stemmed from the structured CDS.
Mr Quinn said the aim of the legacy unit would be to run down the portfolio as quickly as possible.
The group said underlying re-insurance activities remained strong. In property and casualty, it expected a combined ratio – a key industry yardstick of costs and claims as a proportion of premiums – of 97.4 per cent. Life and health also remained “strong”, it said, with a full year benefit ratio of about 85.5 per cent.
Swiss Re said demand for reinsurance had increased, and rates were expected to rise by about 2 per cent, leading to a 6 per cent rise in the group’s volume of business at constant exchange rates. By contrast, Munich Re said renewals in January – one of the key periods for negotiating new contracts, had not gone as well as expected.
Swiss Re will publish its full figures on February 19.
