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Swiss Re gets $1.27 billion in deal with Warren Buffett's Berkshire Hathaway

January 18, 2010 | 10:39 am

Swiss Reinsurance Co. said today it had agreed to transfer a portion of its U.S. life reinsurance business to billionaire Warren Buffet for roughly $1.27 billion to reinvest the funds more profitably. 

The deal with Buffett’s Berkshire Hathaway Inc. will release 300 million Swiss francs -- about $292 million -- in capital reserves for the company, known as Swiss Re. The company hopes to use the funds in “more attractively priced life and health property and casualty business,” it said.

Reinsurance companies sell backup coverage to other insurers to spread their risk as a buffer against massive losses.

Swiss Re said it would continue to provide administration and reporting services for the reinsurance business being transferred to Berkshire and remained committed to the life reinsurance market in the U.S.

The business had liabilities of about $1.85 billion and had failed to meet Swiss Re’s minimum acceptable rate of return of 14%.  Omaha, Neb.-based Berkshire will now be on the line for up to $1.5 billion in potential losses, according to the contract, which takes effect retroactively on Oct. 1, 2009.

Founded in Zurich in 1863, Swiss Re is one of the world’s largest reinsurers and has offices in more than 20 countries. Its stock was down 1.6% to 49.3 Swiss francs on the SIX Swiss Exchange in afternoon trading in Europe.

“This is a significant step forward in Swiss Re’s strategy to increase capital efficiency,” said company official Christian Mumenthaler. “By transferring this block of life business, Swiss Re is monetizing intangible assets and freeing up capital. The transaction puts us in an excellent position to redeploy the capital at more attractive returns.”

Last year, Buffett invested about $2.92 billion (3 billion Swiss francs) in Swiss Re in exchange for a hefty interest rate and a common-stock conversion option. Berkshire already owns Geico Auto Insurance and reinsurance company General Re Corp., as well as diamond businesses, furniture firms, candy companies and more.

-- Tiffany Hsu