Buffett Sinks Billions Into Swiss Re

Written on 6:04 PM by ChaoticMedia

LONDON - The Oracle of Omaha is unlikely to have predicted this. Berkshire Hathaway, Warren Buffett's holding company, said Thursday that it would pour an extra $2.6 billion into Swiss Re to prop up the company's capital base after the reinsurer posted an $861.3 million loss for 2008.

The shock news sent Swiss Re's shares down 14.2%, or 4.28 Swiss francs ($3.69), to 25.88 francs ($22.30), during morning trading in Zurich. In addition to the extra cash raised from Buffett, who currently owns a 3.0% stake, Swiss Re said it would have to raise an extra 2.0 billion Swiss francs ($1.7 billion) from shareholders to re-establish a "strong level" of capital. The company 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.

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."

Swiss Re's stock performance over the past year would suggest that investors disagree. Since January 2008, when Buffett threw the company a lifeline, Swiss Re shares have fallen more than 67.0%. The company's exposure to financial products like credit-default swaps and other derivatives, which together racked up a 6.0 billion Swiss-franc ($5.2 billion) mark-to-market loss for the year, has pummeled investor confidence.

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 investments in Wells Fargo, American Express, Moody's and U.S. Bancorp are all taking a hit from the financial meltdown. (See "Has Buffett Lost His Touch?")

http://www.forbes.com/2009/02/05/swiss-re-buffett-markets-equity-0205_insurance_08_print.html

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