Swiss Re Hit By CDS, Buffett To Invest

Among other moves, Swiss Re is walling off its poorly performing businesses into a “legacy unit” that will include a portfolio of credit default swaps, Financial Guarantee Re and the trading businesses from its former Financial Markets unit. The company says it produced a 2008 mark-to-market loss of $5.1 billion.)

The reinsurer’s good assets will be placed in a newly formed asset management unit responsible for its reinsurance activities and its product underwriting and client markets insurance related operations. Swiss Re says that the U.S. GAAP return on these investments for 2008 is estimated to be around 5% and the total return, a “small positive.”

But the company’s CEO, Jacques Aigrain, asserted that Swiss Re’s core life and health and property-casualty businesses are “performing well.” However, the company did note that the life operations will be affected by unrealized mark-to-market losses from a pre-2000 GMDB product and from certain modified coinsurance products in the U.S.

Swiss Re also noted that the demand for reinsurance is increasing as direct writers try to shore up their capital. It says that it expects to report a rate increase of approximately 2% leading to a volume increase of around 6%.

A.M. Best Company, Oldwick, N.J., placed the financial strength A plus (Superior) rating and issuer credit ratings of aa minus under review with negative implications.

Mark Rouck, a senior director with Fitch Ratings, Chicago, says Berkshire’s investment in Swiss Re does not necessarily indicate further consolidation in the reinsurance market, because further consolidation could raise antitrust issues in an already consolidated line of business. He says he thinks Berkshire simply saw an opportunity to make a good investment.