Billionaire investmor Warren Buffett is to inject three billion Swiss francs ($2.6 billion) into the world's second largest reinsurer Swiss Re. His firm already owns 3 per cent of the Swiss major, purchased one year back.
The news of Buffett's planned cash injection in the leading reinsurer came as Swiss Re today said it expects to post a whopping net loss of one billion Swiss francs for the full year 2008.
General Electric Co., Goldman Sachs Group Inc. and Harley- Davidson Inc. are among the companies that have gone to Buffett in the last year after the global credit crunch made it more difficult to get funding. The Omaha, Nebraska-based billionaire also is the largest shareholder in American Express Co. (See: Warren Buffett invests $5 billion in Goldman Sachs and Warren Buffett invests $3 billion in GE's $15-billion capital raising )
Berkshire Hathaway's latest investment comes in the form of convertible notes paying a 12 per cent coupon, Swiss Re said. Berkshire can convert them to Swiss Re shares after three years at a price of 25 francs apiece or continue to receive ''perpetual'' payments of 12 per cent a year.
Noting that it expects to report a net loss of about one billion Swiss franc for 2008, the company said that it is taking significant measures to reinforce the capital strength. The stock slumped 28 per cent to 21.70 Swiss francs, the most since at least 1990, after posting the loss and announcing plans to cut the dividend.
"In addition to ongoing de-risking in its investment portfolio, the group is raising three billion Swiss franc of capital from Berkshire Hathaway Inc, subject to shareholder approval," the firm said in a statement today.
While Swiss Re said it has more capital than regulators require, it needed at least 1.5 billion francs on 31 December to keep its credit rating. The company plans to get approval to sell as much as 2 billion francs of additional stock, it said.
"We are disappointed with our overall results in 2008, but our core business is performing well," said Swiss Re chief Jaques Aigrain.
The company has made losses on contracts sold to protect clients against drops in fixed-income securities. So far this year, its stock has declined some 40 per cent.
''The contacts were extremely recent, and the solutions were developed in an extremely short time-frame, leading to a signing of our agreement during the night,'' Aigrain told reporters. While the 2008 results are disappointing, Buffett's decision to increase his investment in Swiss Re ''is a testament to the strength of our franchise,'' Aigrain said.
The company is now disbanding its financial markets unit as part of the ''derisking'' strategy, Swiss Re said. Remaining assets will be split between the asset-management division and a new ''legacy'' unit to hold the company's credit-default swaps, which provide guarantees against corporate bond defaults.
The financial markets unit cut 40 jobs worldwide between the end of 2007 and 31 October 2008, Swiss Re said. It also eliminated 80 technology jobs. ''You can never rule out job cuts,'' CFO George Quinn said. ''The firm has significant scope to improve its cost base.''
Swiss Re is reviewing its target of 14 per cent return on equity, Quinn said. The revisions will ''take account of improvements in reinsurance and expected lower returns on capital,'' he said.