UPDATE 3-Swiss Re waits to repay Buffett as capital improves

* Q3 net profit 334 mln Sfr vs forecast 115 mln Sfr

* Excess capital over 6 bln Sfr

* Combined ratio 84.5 pct vs 93.1 pct forecast

* Against "dilutive" rights issue

* Shares rise nearly 7 pct

(Adds shares; CFO, analyst comment)

By Jason Rhodes

ZURICH, Nov 3 (Reuters) - Swiss Re (RUKN.VX) said it would wait before repaying a costly convertible loan from Warren Buffett, after strengthening its capital and beating profit forecasts in the third quarter.

Investors are speculating about when the world's second-biggest reinsurer will pay back billionaire U.S. investor Buffett, who pumped 3 billion Swiss francs ($2.9 billion) into the company at the height of the global financial crisis after it wrote down billions on illiquid assets.

Swiss Re Chief Financial Officer George Quinn said on Tuesday that the reinsurer was unlikely to make an early repayment of Buffett's three-year loan, which carries a hefty 12 percent coupon, because of a steep penalty.

"It doesn't make sense at this stage to do that," Quinn said. "That would entail a premium of 40 percent today, versus a 20 percent premium if we wait another 18 months. But it's a topic that we review regularly."

The Zurich-based reinsurer's shares hit a record low of 11.88 francs in March, shortly after it accepted help from Buffett's Berkshire Hathaway (BRKa.N).

But the stock has since staged a strong recovery, prompting some analysts to argue Swiss Re should raise fresh capital from shareholders and repay Buffett early in a show of renewed vigour to investors and rivals. [ID:nLS21535]

Quinn argued against this proposition. "We said earlier this year we would do everything we could to avoid a dilutive rights issue. That's a philosophy that hasn't changed today," he said.

Its shares traded 6.7 percent higher by 1033 GMT, against a 2.4 percent drop in the DJ Stoxx European insurance index .SXIP.

"The result looks promising overall," said Vontobel analyst Stefan Schuermann. "We believe the insurer has come a step closer to paying back the Berkshire loan, which is good news."

FAT MARGINS

The bottom lines of reinsurers, which cover other insurers' risks, are being helped by the lack of major damage from storms as the Atlantic hurricane season winds to a close at the end of this month.

New Chief Executive Stefan Lippe is steering Swiss Re, which booked a loss last quarter, back to profitability by focusing on reinsurance underwriting basics after it wrote down billions on illiquid assets under his investment banker predecessor Jacques Aigrain.

The world's biggest reinsurer Munich Re (MUVGn.DE) and No. 4 player Hannover Re (HNRGn.DE) are both expected to swing to profit in the third quarter after booking losses a year ago. [ID:nL2210718]

Swiss Re posted a net profit of 334 million francs for the third quarter, beating forecasts as fat operating margins and gains on structured products offset falling premiums and writedowns on corporate bonds.

Swiss Re's property and casualty combined ratio, a measure of profitability, improved to 84.5 percent from 99.6 percent a year earlier, showing wide margins. A combined ratio below 100 percent shows insurance operations are profitable.

Data from StarMine, which weights analysts' forecasts according to their track record, shows Swiss Re trades at 8.8 times 12-month forward earnings, a premium to rivals Munich Re at a multiple of 7.8 and Hannover Re HRNGn.DE at 6.5.

"During the first nine months of 2009, our excess capital at the AA level improved to over 6 billion francs," Lippe said. ($1=1.021 Swiss francs) (Additional reporting by Rupert Pretterklieber in Zurich and Jonathan Gould in Frankfurt; Editing by Greg Mahlich)