Ailing Swiss Re has been given a timely lift by Warren Buffett's Berkshire Hathaway group, which has bought a three per cent stake in the world's largest reinsurer.This content was published on January 24, 2008 - 16:13
Berkshire will assume 20 per cent of Swiss Re's property and casualty exposure over the next five years as part of the deal. Shares have continued to rise on the back of Wednesday's announcement.
The Zurich-based reinsurer announced in November that it would have to write down SFr1.2 billion ($1.1 billion) related to United States subprime mortgage losses. This followed a SFr1.21 billion payout bill for natural disasters in 2007 – higher than the previous year.
Shares that had dipped to below SFr70 rebounded to over SFr80 by the middle of Thursday.
"This is a remarkable statement of trust and confidence by probably the most knowledgeable insurance investor in the world," Swiss Re chief executive Jacques Agrain told the Financial Times. "We are extremely proud to have [Berkshire] among our shareholders."
Bank Vontobel analyst Heinrich Wiemer agreed that Buffett's personal seal of approval carried a lot of weight, despite only taking a small stake. The iconic investor, known as the "sage of Omaha", has built a vast fortune through shrewd acquisitions in the insurance sector.
"Buffett is the world's most respected insurance insider and long-term anti-cyclical investor. You probably could not find a more authoritative voice in insurance," he told swissinfo.
The Berkshire Hathaway deal both softens Swiss Re's exposure to property and casualty claims and frees up more money for its continuing share buyback scheme. The firm's initial plan to buy back up to SFr6 billion ($5.51 billion) of shares has now risen to SFr7.75 billion.
The so-called "quota share" agreement that allows Berkshire to take over a fifth of Swiss Re's property and casualty risks comes with the upside of claiming 20 per cent of premiums paid. The mechanics of the deal are not unusual in the industry, but the scale is larger than average, according to Wiemer.
The deal gives Berkshire greater access to the European market and a means of channelling its funds away from the shaky dollar. Precise details have not been revealed but the three per cent stake is estimated to be worth around $800 million (SFr870 million).
It has also led to speculation about the future intentions of Buffett. Most analysts do not expect Berkshire to launch a full takeover, but some believe it may increase its stake at a later date.
"I wonder if this is purely a financial investment or just a first step towards something more," insurance expert Peter Maas from St Gallen University told swissinfo.
"Investors needed a new storyline because although the general business model worked, earning money in the traditional reinsurance markets, the newest financial services division had problems. So where does the trigger for new development come from? It could come from outside."
swissinfo, Matthew Allen in Zurich
Swiss Re became the world's largest reinsurer when it bought General Electric's insurance solutions in 2006. It insures large or very volatile risks for other insurance companies.
Founded in 1863, it operates through offices in more than 30 countries.
It made a net profit in 2006 of SFr4.6 billion, double that of the previous year. But the company was hit with an expected SFr1.21 billion ($1.1 billion) bill for natural catastrophes in 2007 compared to SFr1.91 billion in 2006.
It was also forced to write down a further SFr1.2 billion last year as a result of the US subprime mortgage crisis. It will announce its 2007 annual results on February 29.
Berkshire Hathaway is a conglomerate holding company owned by legendary investor Warren Buffett that manages a number of subsidiary companies.
Its core business is insurance, but it also has a diverse range of companies in its portfolio, in the fields of retail, newspaper publishing, manufacturing, construction, clothing and food production.
Buffett bought Berkshire Hathaway in the 1960s and transformed it from a failing textile manufacturer into a holding company, directing its excess cash into buying shares in other enterprises.
Buffett was ranked as the second-richest man in the world behind Bill Gates by Forbes magazine in September last year. But he is known for his frugal lifestyle and philanthropy and has announced his intention to donate his $44 billion (SFr48 billion) fortune to charity.
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