Swiss Re deal with Buffett lands $1.3bn

City A.M. Reporter
Swiss Re yesterday said it had agreed to transfer a US life reinsurance contract to Warren Buffett for 1.3bn Swiss francs ($1.27bn, £778m), allowing it to reinvest capital more profitably elsewhere.

Under the deal, the US investor’s Berkshire Hathaway group will pocket premiums payable under the contract, while taking responsibility for paying up to $1.5bn in potential claims, Swiss Re said in a statement.

The transfer will also release about 300m Swiss francs in capital reserves for Swiss Re, which is trying to leverage its capital to squeeze as much profit out of underwriting as possible.

“Swiss Re’s situation has stabilised but top line and underlying profitability on the life side remain challenging,” said Vontobel analyst Stefan Schuermann.

Berkshire pumped 3bn Swiss francs into Swiss Re at the height of the global financial crisis after its Swiss competitor wrote off double that amount in toxic assets.

Analysts said the deal confirmed Swiss Re’s strategy of building its capital and focusing on high-margin business, while noting that it increased the company's exposure to Buffett.

“We view the deal as another example of self-help as the company normalises its capital and earnings position,” said Collins Stewart analyst Ben Cohen.

Berkshire might be prepared to take higher investment risks with the 1.9bn Swiss francs of assets held in the life business than Swiss Re, which is steering a safety-first course under new chief executive Stefan Lippe after the more flamboyant approach of his investment banker predecessor, Jacques Agrain. Swiss Re could redeploy the capital the deal frees up in any part of the business, chief financial officer George Quinn said.

Swiss Re said the business it is passing to Berkshire Hathaway no longer met its investment threshold, and that transferring it would have boosted operating profit at its life unit by 40m Swiss francs in the first nine months of 2009.