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The Actuary The magazine of the Institute & Faculty of Actuaries

Swiss Re seeks injection from Berkshire Hathaway

Warren Buffet has injected SFr3bn into struggling Swiss Re, in a move that could give him almost 30% of the world’s second largest reinsurer. Berkshire Hathaway, the investment business run by Mr Buffett, already owns 3% of Swiss Re and will charge the reinsurer a high interest rate of 12% for the funding over three years. Berkshire also reinsures 20% of Swiss Re’s property and casualty book via a quota share retrocession deal struck in 2008.

Swiss Re reported a preliminary annual net loss of SFr1bn and scrapped its financial markets activities after increased write-downs on structured credit default contracts. The results confirmed analysts’ worst fears. Swiss Re shares fell by 28% to SFr21.70 in February. Swiss Re admitted that, at year end, it was SFr1.5bn to SFr2bn below the level required to maintain its AA credit rating. The group had intended to cut dividends to SFr0.10, to preserve capital. Scrapping the dividend altogether was not possible, because it could prevent some institutions from investing.

The transaction, which is subject to shareholder approval, is likely to take the form of a perpetual note, giving Berkshire the option in three years’ time to convert into Swiss Re shares at SFr25. Swiss Re has also announced that it intends to raise further equity of up to SFr2bn, subject to market conditions.

Fabrizio Croce, of Kepler Capital Markets, said: “We expected a profit warning but never thought the capital position would be so desolate. While the conditions set by Berkshire are outrageously bad for Swiss Re, the company and shareholders will probably have to accept them as there is no alternative.”

Mr Buffet has made a number of opportunistic moves in the market since the onset of the financial crisis, including deals to invest $5bn in Goldman Sachs and $3bn in General Electric, receiving favourable terms in both cases. Swiss Re announced its full year results on 19 February.