Swiss Re strategy doubted as teams up with Buffett

ZURICH (Reuters) - Swiss Re (RUKN.VX) clinched a deal with U.S. billionaire Warren Buffett, giving its beaten-down shares a fillip, but raising concerns the reinsurer was giving a rival too much access to its core business.

Swiss Re said Buffett's investment vehicle, Berkshire Hathaway (BRKa.N) would take 20 percent of all its property and casualty reinsurance business, freeing up more capital for it to return to shareholders. Financial details were not disclosed.

Berkshire also bought a 3 percent stake in Swiss Re, the world's largest reinsurer, whose shares have been battered after it became the first major insurance victim of the credit crisis.

The news on Wednesday that one of the world's most respected investors was teaming up with Swiss Re gave the company a much-needed confidence boost. Its shares rose 12 percent in early trading, pulling along rival reinsurers.

"Buffett obviously thinks all bad news is in the price and they don't come much smarter, especially in the insurance space. Big positive sector read-across today," one trader said.

Swiss Re stock has been hammered since its 1.2 billion Swiss franc ($1.10 billion) subprime-related writedown in November, as markets feared more bad news.

The company's reassurances have done little to convince investors the stock is worth buying, despite some analysts saying the company is now looking like a bargain.

Swiss Re shares pared gains by 8:43 a.m. ET on Wednesday to change hands at 75.20 francs, up 2.2 percent.

The news also supported Europe's insurers, with the Dow Jones Stoxx insurance sector index .SXIP down 2.8 percent, a smaller fall than overall markets.

RAISED EYEBROWS

But the fact that Swiss Re was paying a rival to take so much of its core business rival raised further doubts about the group's strategy. Analysts also wanted to know how much the group was paying for ceding its risk exposure.

"Berkshire Hathaway is not a charity and when we see them taking such a significant role in the strategic future of a major competitor, we believe it is wise to be cautious," brokerage Keefe, Bruyette & Woods said in a note.

Under the so-called quota share contract, Berkshire would take a 20 percent share of all Swiss Re's property and casualty business for the next five years, leading to a reduction in Swiss Re's capital deployed and allowing the company to buy back more shares.

"Dealers may like the extra share buyback, but investors will regret the loss of earnings potential in the core business," Vontobel analyst Heinrich Wiemer said in a note.

The company would add 1.75 billion francs to its earlier 6 billion franc share buyback program, expecting the extra return of capital to be completed over the next 24 months.

The deal would boost profit and profitability trends at Swiss Re, a spokeswoman said, enhancing potential for both earnings per share and return on equity.

Berkshire had bought the shares in the market, Swiss Re said, declining to say how much it had paid. At Tuesday's close, the stake would be worth about 830 million francs.

Swiss Re declined to say whether Berkshire had expressed any intention to increase its stake.

"We believe the agreement with Berkshire is scalable up to an offer for the entire company," Fabrizio Croce, an analyst at Landsbanki Kepler, said in a research note.

Other reinsurance stocks also rose on the news, with France's Scor (SCOR.PA) up 2 percent, while Hannover Re (HNRGn.DE) and Swiss Re's largest rival Munich Re (MUVGn.DE) were long in positive territory before markets turned.

Buffett, known for his astute value investing, in December started a bond insurer through Berkshire Hathaway, to help U.S. state and local governments lower their borrowing costs as established rivals are struggling with credit market turmoil.

Berkshire owns more than 70 businesses, including auto insurer Geico Corp and reinsurer General Re Corp. It said it ended September with $47.08 billion of cash.

Berkshire could not immediately be reached for comment.

(Reporting by Douwe Miedema; Editing by Erica Billingham)