UPDATE 3-Swiss Re books FY loss, seeks to regain AA rating

* Swiss Re FY net loss 864 mln Sfr

* Long-term target is to maintain capital in the AA range

* January renewals resulted in 2 pct rates increase

* 2 bln Sfr rights issue on backburner

* Shares outperform insurance peers

(Recasts; adds analyst comment, details, shares)

ZURICH, Feb 19 (Reuters) - Swiss Re RUKN.VX said it aims to regain a higher capital base in the long-term, as it posted slightly better full-year numbers than anticipated and put a large rights issue on the backburner.

The decision to shelve the rights issue, announced on Thursday, effectively means a return to Swiss Re's previous AA rating is out of the question for the time being.

The world's second-biggest reinsure can now concentrate on generating returns in the shorter term, rather than raising further capital from disgruntled shareholders.

"The downgrade frees up precious capital which could help to unwind the problematic structured product portfolio and support the new CEO in achieving his demanding target," said Kepler Capital Markets analyst Fabrizio Croce.

"We think it would be an error in this environment to stop raising further capital. We were strong believers in the need for at least 5 billion Swiss francs," Croce said.

The company, which is disbanding its troublesome financial markets operations, has suffered massive writedowns on risky assets and has had to shore up its capital base with an investment from Warren Buffett. [ID:nL571925]

Writedowns and capital concerns have wiped off more than half the stock's value in 2008, far behind Munich Re (MUVGn.DE), the world's largest reinsurer, and Hannover Re (HNRGn.DE).

Swiss Re said it made a 2008 net loss of 864 million Swiss francs ($735.3 million) and its shareholders' equity was 20.5 billion Swiss francs at end-2008 -- both slightly better than its preliminary estimates.

By 1018 GMT, its shares were up 0.8 percent to 17.76 francs, outperforming a 0.2 percent fall in the DJ Stoxx European insurance index .SXIP.

Meanwhile, Swiss Re's five-year senior credit default swaps were trading at 490 basis points at 1000 GMT, unchanged from Wednesday's close but about 40 basis points wider since before it announced heavy writedowns on Feb. 12.

Its CDS traded as wide as 647 basis points late last year on concerns about balance sheet weakness.

Five-year CDS of rivals Munich Re and Hannover Re were trading at 59 and 83 basis points respectively on Thursday.

SHUFFLING MANAGEMENT

Swiss Re replaced its Chief Executive, Jacques Aigrain, with industry veteran Stefan Lippe last week in a bid to steer it back to reinsurance basics after a surprise preliminary announcement of a large full-year loss and hefty writedowns. [ID:nLC532472]

Lippe chose not to give any indication on strategic changes on Thursday after just one week at the helm of Swiss Re, which said it would provide a update in the first quarter.

"The new CEO needs some more time -- that's bad news," said Vontobel analyst Stefan Schuermann. "It looks like the decision to get rid of Aigrain was rushed."

The company is targeting a combined ratio of 95 percent for 2009, it said, adding it aims to save 200 million francs in costs in 2009 and 400 million by end 2010.

The outlook for client demand and reinsurance pricing was improving for its Property and Casual and Life & Health operations and January renewals resulted in a rise of about 2 percent in prices, with volumes up about 6 percent at constant rates.

COMPETITORS EXPECT IMPROVEMENT

Competitors Munich Re, Hannover Re and Scor (SCOR.PA) have all said they expect prices and conditions to improve this year, supporting Swiss Re's pricing outlook. [ID:nLB683243]

Swiss Re would seek approval to increase authorised share capital by no more than 180 million shares, but there were no plans to conduct a rights issue for now.

"If investment losses continue to mount, the group will have the flexibility to raise new capital quickly," said Collins Stewart analyst Ben Cohen, adding that the exposure to risky assets relative to the balance sheet remained high.

The promise of additional capital had in any case been too little to save Swiss Re's AA rating, a key indicator of its ability to cover its reinsurance liabilities. Ratings agency S&P cut its rating to A+ on Wednesday because of the larger-than-anticipated capital depletion in 2008. [ID:nWNA6812]

S&P also cited the company's battered share price, credit default swap (CDS) levels, yields on its bonds and its exposure to Berkshire Hathaway.

"I think Swiss Re can live with the single A rating for now," said Vontobel's Schuermann. (Editing by Simon Jessop and Andrew Macdonald)