Swiss Re has projected net losses of SFr1 billion ($860 million) for 2008 but expects to cushion the blow with a capital injection from billionaire Warren Buffett.
News of the losses and a large writedown left the Zurich-based group's share price plummeting, ending Thursday 28 per cent lower on the Swiss stock exchange.
The world's second-largest reinsurer wrote down SFr6 billion in toxic assets in 2008 as its shareholder equity dropped, offsetting a strong underwriting performance, the group said.
In a statement it announced that it would be taking "significant" measures to recapitalise to remedy the situation.
Buffett's Berkshire Hathaway conglomerate holding company, which bought a three per cent stake in Swiss Re in 2008, has agreed to invest a further SFr3 billion. The move, which is still subject to shareholder approval, would give Buffett a 20 per cent stake in the group.
Buffett, ranked the world's richest man by Forbes magazine in 2008, said he was "delighted" to be able to increase his investment in Swiss Re.
The group said it might also seek a further SFr2 billion on the capital markets.
Its future plans include reorganising its financial market activities into two new businesses, including a unit for managing structured credit default swaps and other toxic assets.
The full-year results are due to be released on February 19. Thursday's announcement was based on preliminary figures and followed pressure on its shares in recent weeks as investors worried about the possibility of writedowns and the need for more capital.
Analysts had been predicting for weeks that the group would suffer a bad fourth quarter.
Chief executive Jacques Aigrain said in the statement that he was disappointed with the full-year results but the underlying operating performance was "excellent".
"We have taken steps to protect our capital strength to ensure the continued trust of our clients. Warren Buffett's agreement to invest in Swiss Re is a testament to the strength of our franchise," he noted.
Catherine Stagg-Macey, senior analyst at financial research firm Celent, said Swiss Re's announcement would be received with mixed feelings by investors.
"The bad news is Swiss Re's results, but the good news has to be Buffett backing one of the world's best known reinsurers," she said.
"This surely has to send a strong signal to the financial community that not all is rotten in Zurich."
The private bank Wegelin & Co said people's worst fears had been realised and noted that the saying 'there is no smoke without fire' had been confirmed in this case.
Other experts commented that the group's capital problems should, however, be resolved with the recapitalisation plans.
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Swiss Re was founded in Zurich in 1863 and operates in reinsurance - the business of insuring the insurers - through offices in more than 25 countries.
The company's traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management.
For the full year 2007, Swiss Re reported net income of SFr4.2 billion, nine per cent down on its 2006 result.