Swiss Re Repays Buffett as Quarterly Profit Doubles

Thursday, 04 Nov 2010 07:38 AM

 

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Swiss Reinsurance Co., the world’s second-largest reinsurer, rose the most in almost six months in Zurich trading after quarterly profit doubled and it agreed to repay the capital injected last year by Warren Buffett.

While Swiss Re will post a charge of about $1 billion in the fourth quarter, the reinsurer won’t incur a penalty for repaying Berkshire Hathaway Inc. early, the Zurich-based company said today in a statement. Swiss Re previously said it would incur a premium if it repaid Buffett before March 2011.

Swiss Re is bidding to regain its AA credit rating, which Standard & Poor’s cut in February 2009 after record losses forced the company to raise 3 billion Swiss francs ($3.1 billion) of capital from Buffett. S&P revised the reinsurer’s rating outlook to positive last month, saying that may lead to an upgrade should Swiss Re’s “financial profile” improve.

“The early repayment removes any residual uncertainty about Swiss Re,” said Tim Dawson, a Geneva-based analyst with Helvea SA. “The bulls will point to capital strength today and the very strong performance in the non-life business.”

Swiss Re climbed as much as 7.3 percent, the biggest gain since May 10, and traded 6.3 percent higher at 50.45 francs as of 9:37 a.m. in Zurich. That made the stock the best performer on the 29-member Bloomberg Europe 500 Insurance Index and boosted the company’s market value to 18.7 billion Swiss francs.

Swiss Re turned to Buffett the week before replacing Jacques Aigrain as chief executive officer and abandoning his strategy of trading risky securities such as credit-default swaps to boost earnings. The reinsurer reported record writedowns and losses of $8.3 billion in 2008.

Excess Capital

Swiss Re said it will still hold “significant” excess capital above the AA level after repaying Berkshire Hathaway. Chief Financial Officer George Quinn said in September that the reinsurer aims to hold between $3 billion and $5 billion of reserves above the amount required by S&P for the AA rating.

“Our improved capital position allowed us to reach an agreement to repay Berkshire Hathaway, with no additional charge for bringing forward the repayment date,” CEO Stefan Lippe said in a statement.

The company said in May that repaying Berkshire Hathaway will cost a “bit less” than $3.5 billion.

“The repayment announcement concerning the Berkshire Hathaway convertible is an extremely positive surprise,” said Christian Muschick, a Frankfurt-based analyst with Silvia Quandt & Cie. “We expected repayment in March. The stock will fly today.”

Buffett Stake

Swiss Re hasn’t been notified of whether Buffett has increased his stake of about 3 percent in the reinsurer, CFO Quinn said today on a conference call. Billionaire Buffett raised his stake in larger rival Munich Re to more than 10 percent last month.

Third-quarter net income rose to $618 million from $314 million a year earlier, Swiss Re said. That beat the $484 million average estimate of 12 analysts surveyed by Bloomberg.

Operating income at Swiss Re’s asset management unit rose 68 percent to $1.17 billion after fewer impairments.

“Asset management definitely will be more positive in the quarter as most asset classes had positive performance,” Stefan Schuermann, a Zurich-based analyst with Vontobel Holding AG, said before the results were announced.

Spending on claims and costs as a percentage of premiums, the so-called combined ratio, improved to 76.4 percent from 84.5 percent a year earlier. The Sept. 4 earthquake in New Zealand, the nation’s worst in eight decades, cut Swiss Re’s operating income by $160 million.

Life Business

Operating income at the property and casualty unit, which provides natural disaster reinsurance coverage, increased to $1.1 billion from $938 million.

The life and health unit reported operating income dropped to $119 million from $363 million the year before.

Earnings at reinsurers including Munich Re and Swiss Re will fall this year as the highest levels of reserves on record prompt firms to compete for business, driving down premium rates, according to Fitch Ratings Ltd.

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