Buffett secures Swiss Re's US arm

Swiss Re sells section of business

Global reinsurance giant Swiss Re has reportedly sold a section of its US business to none other than billionaire investor Warren Buffett - or, more specifically, Buffett's investment behemoth Berkshire Hathaway.

According to reports by the BBC, the Swiss company, which closed the deal for SFr1.3 billion ($778 million), hopes the sale will "free up capital" that can be invested more profitably elsewhere.

Reports also confirm that the deal with Buffett's company, which already has a stake in Swiss Re, actually takes retroactive effect from 1 October last year and frees up as much as SFr300 million ($293 million) in capital.

Significant step

In fact, according to Christian Mumenthaler, who is in charge of Swiss Re's life and health department, the deal marks a "significant step" in the firm's strategy to increase capital efficiently.

"This transaction puts us in an excellent position to redeploy the capital at more attractive returns," he added.

"Retrocession"

Despite the sale, however, reports also show that Swiss Re will continue to carry out the administration and reporting roles for the US business in question. That's because this kind of deal, known as "retrocession", means that the Swiss-based company has merely transferred the business to another reinsurer: in this instance, Berkshire Hathaway.

Its actually a common tact by reinsurers, who often sell back-up coverage to other financial services firms in an effort to spread out the risk of experiencing huge losses.

Reports say that among previous deals with seasoned investor Buffett, Swiss Re had its property and casualty reserves reinsured last year to cover up to SFr5 billion ($4 billion) in losses.

In addition, Berkshire invested SFr3 billion ($2.9 billion) in Swiss Re last year, with the possibility of converting the investment into conventional Swiss Re shares in 2012. This would allow Berkshire to control roughly one-quarter of Swiss Re.

However, while analysts mostly welcomed the deal, noting how the freed-up capital could be used for more profitable business, shares in the reinsurance giant nonetheless closed down 1.6 percent yesterday according to the Zurich stock exchange.

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