Hurt by credit default swaps, Swiss Re announced an anticipated 2008 loss of approximately $860 million) and a $2.58 billion investment by Warren Buffett to shore up its capital position.

The Zurich company says that its total capital need could total $4.3 billion.

Following the announcement, Standard and Poor’s placed the company’s AA- insurer financial strength rating and long-term counterparty credit rating on CreditWatch with negative implications. The action was taken because “both the magnitude of the additional write-downs and the resulting need to raise capital are outside of our expectations,” according to S&P analyst Peter Grant.

Swiss Re said it took the action because its capital position was between $1.29 billion to $1.7 billion. Based on current estimates, the total amount of capital to be raised is $4.3 billion, the company said.

Consequently, Berkshire Hathaway will invest in Swiss Re through a convertible perpetual capital instrument with a 12% coupon, subject to shareholder approval. The instrument can be converted into Swiss Re shares at $ 1.50) after 3 years, subject to anti-dilution adjustments.

At mid-morning following the announcement, Swiss Re’s stock was down 27.5% to $18.79.

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.