Swiss Re turns to Buffett for $2.6bn in fresh funding

SWISS RE yesterday turned to Warren Buffett, the legendary US investor, for about $2.6 billion in fresh funding and cut its dividend to virtually nothing as it struggled to retain its investment-grade credit rating.

The deal, which will pay Mr Buffett hefty annual interest and give him the right to raise his stake at an attractive price, is a sign that the billionaire investor has not lost his appetite for financial stocks.

Mr Buffett has suffered paper losses on most of his portfolio of financial holdings, which include Goldman Sachs and American Express, as share prices in the sector have plummeted.

The Swiss reinsurer also reported a preliminary annual net loss of SFr1 billion (€667 million) and scrapped its financial markets activities after increased writedowns on structured credit default contracts.

The results confirmed analysts’ worst fears. Swiss Re shares fell by 28 per cent to SFr21.70 (€14.47).

More than half of the SFr5 billion Swiss Re may raise will come from Berkshire Hathaway, Mr Buffett’s conglomerate. He already has a 3 per cent stake and could eventually own more than 20 percent.

Berkshire’s holding, which is subject to Swiss Re shareholders’ approval, will probably be via a perpetual note paying annual interest of 12 per cent. The US investor will have the option in three years to convert into Swiss Re shares at SFr25.

The decision to raise capital followed Swiss Re’s admission that, at year-end, it was SFr1.5-2 billion below the level required to maintain its current AA credit rating. To preserve capital, the group intends to cut its dividend to SFr0.10.

Shareholders’ equity fell to SFr19-20 billion at year-end following unrealised losses on investments in the fourth quarter and exchange rate factors.

“We expected a profit warning but never thought the capital position would have been so desolate,” said Fabrizio Croce of Kepler Capital Markets. “While the conditions set by Berkshire are outrageously bad for Swiss Re, the company and shareholders will probably have to accept them.”

Swiss Re said it would raise further equity of up to SFr2 billion, subject to market conditions. Swiss Re will publish full figures on February 19th. – ( Financial Timesservice)