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Swiss Re hit by fresh write-down concerns; insurance stocks slide

Swiss Re led the slide in European insurance stocks on Friday (23 January) as its share price fell more than 20 percent amid concerns that it is set for a further round of heavy write-downs and may need to raise capital when it reports its fourth quarter 2008 figures next month.

Although the company's shares have rallied this morning - up 15 percent to SFr31.16 at the time of writing - Friday's movement meant the reinsurance giant's share price had fallen over 40 percent in the week from the previous Friday's close of SFr46.32 to end the week at SFr27.

On a bleak Friday for insurance stocks, the Dow Jones Eurostoxx insurance sector index was down 5 percent, with significant fallers including Zurich Financial Services, down 6.5 percent at SFr187.10, Allianz, down 5.2 percent at EUR59.56, and AXA, which fell 8 percent.

Lloyd's stocks also suffered on the London Stock Exchange, including Catlin, 8.42 percent lower at 372.75p, Amlin, down 7.87 percent to 362p, and Hiscox, which fell 4.98 percent to 305p, while UK insurer Aviva saw its share price dip 9.19 percent to 257p by mid afternoon.

Swiss Re - whose shares were trading above SFr90 as recently as last April - has struggled to regain investor confidence over its ultimate exposure to losses arising out of sub-prime and credit crunch woes.

The company suffered a SFr5.2bn net unrealised capital loss together with a SFr2.2bn net realised capital loss in the nine months to 30 September 2008 - including a SFr1.5bn write-down on two structured credit default swap contracts.

But despite feverish speculation that it was set to unveil drastic measures to ease liquidity pressures last autumn, Swiss Re did little more than post a relatively modest third quarter loss.

Nevertheless, at the time analysts commented that there could be worse news to come on financial impairments.

Ratings agency AM Best added to concerns last month as it downgraded the reinsurer's credit ratings a notch on its financial strength ratings on its "declining capital position and weakening overall earnings".

The company has been highlighting a hedging strategy that it says has "significantly reduced" exposure to corporate credit and equity markets.

The company also has exposures to variable annuities through its Admin Re life business, which it was disclosed held SFr15.2bn in annuity reserves at September last year.

The company hedges the capital market risk on variable annuity deals up front, but in a report by Moody's released today, concerns were raised about the success of such strategies.

"To avoid and manage regulatory capital on inforce business, as well as to protect economic capital, companies have reinsured business offshore, utilised external reinsurance, and hedged the VA guarantees," said the ratings agency in the report.

But Moody's vice president Scott Robinson added: "However, these hedging programs vary widely in structure, and their efficacy over the long term is still uncertain."

Last month, Swiss Re revealed it had entered into a $1.5bn long-term letter of credit (LOC) facility with JP Morgan to support its life reinsurance business.

The new LOC facility matures in 2028 with a potential price reset after the first 10 years, and replaces and increases its existing funding arrangements to meet US regulatory requirements for its life business.

In January last year, Swiss Re entered into a 20 percent five-year P&C quota share reinsurance deal with Berkshire Hathaway to support its non-life business.

Speculation is also gripping the Zurich-based reinsurer about the future of its chief executive Jacques Aigrain and chief financial officer, George Quinn, with suggestions that they are both preparing to step down later this year.

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