Warren is Buffeted by Moody’s Downgrade: Berkshire Cash not Enough?

No Mr CLS, we don’t quite have the presidential suite ready at the Do Slabb Inn for Mr Buffett so while we wait here is a Berkshire Hathaway appitizer courtesy of the National Underwriter:

Moody’s Investors Service in London said today it has downgraded the loss-battered Swiss Reinsurance Company and its subsidiaries yet another notch.

The rating service–which on Feb. 6 had dropped the company from “Aa2” to “Aa3” (“Excellent”)–said it has now cut the firm’s insurance financial strength and senior debt ratings from “Aa3” to “A1” (“Good”) and assigned a negative outlook. Short-term ratings of “Prime-1” were affirmed.

Swiss Re’s rating problems began with the firm’s surprise revelation on Feb. 6 that it might have losses for 2008 of up to CHF 1 billion ($860 million, at current exchange rates), and that it had made arrangements to secure $2.6 billion in capital from Berkshire Hathaway and would cut back its dividend. The loss figure was changed to CHF $864 million ($736.3 million) last Friday. 

Before that, on Feb. 12, Swiss Re replaced its chief executive officer, Jacques Aigrain, with Deputy Chief Executive Officer and Chief Operating Officer Stefan Lippe.

Moody’s said its rating downgrade is prompted by Swiss Re’s “weakening profitability, capital adequacy, and financial flexibility metrics.”

Going forward, Moody’s said it expects the Group’s core reinsurance activities to continue to perform well, but sees the potential in the short-term for overall profitability to be suppressed by further mark-to-market losses.

The rating firm said that, notwithstanding an excellent market position, the firm’s business franchise may be weakened to an extent by its year-end 2008 results, although Swiss Re remains in a good position to take advantage of improved market conditions, with the negative outlook principally driven by the challenge of running off the Group’s legacy portfolios.

Moody’s analysis found that a big factor in the 2008 loss was Swiss Re’s Legacy unit, which produced mark-to-market unrealized losses for the full year 2008 of approximately CHF 6 billion ($5.14 billion), including CHF 2 billion (($1.72 billion) on the two structured credit default swap (SCDS) transactions.

The Legacy unit, it was noted, contains discontinued non-core activities, including the two SCDS, as well as the portfolio credit default swaps, Financial Guarantee Re and former trading activities.

These losses, said Moody’s, have overshadowed good operating performance from Swiss Re’s continuing operations, with a full year combined ratio of 97.9 (or 96.1, excluding unwind of discount), a Life and Health benefit ratio of 85.5, and a positive total return on investments, excluding Legacy business, of 0.6 percent..

Key financial metrics at the company have deteriorated, driven by a 36 percent reduction in shareholders’ equity during 2008, but gross and net natural catastrophe exposures at a 99.6 percent aggregate probable maximum loss level remain within Moody’s “Aa” (“Excellent”) parameters, the firm said.

Despite a meaningful reduction in available capital, the Group’s economic capital adequacy ratio of 207 percent at year end 2008, compared with 299 percent for 2007, was said to be above the Swiss Re Group target range of 175-200 percent.

Moody’s said company cost savings, as well as a capital infusion from Berkshire Hathaway of $2.6 billion (subject to shareholders’ approval on March 13) was taken into account in its assessment, but “the potential remains for further capital erosion in light of the nature of Swiss Re’s investment and legacy portfolios.”

Moody’s said it believes that Swiss Re’s capital-raising options have narrowed in the event of future capital depletion, but added that the firm has excellent product risk and diversification, as well as a strong market position.

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