Aug. 5 (Bloomberg) -- Swiss Reinsurance Co., the world's second-largest reinsurer, said profit dropped 53 percent after 362 million Swiss francs ($345 million) of writedowns related to credit-default swaps.

Second-quarter net income fell to 564 million francs, or 1.65 francs a share, from 1.19 billion francs, or 3.22 francs, a year earlier, the Zurich-based company said in a statement today. Earnings missed the 773 million-franc median estimate of 11 analysts surveyed by Bloomberg as premium income fell a more- than-expected 23 percent to 6.11 billion francs.

Swiss Re said today it agreed to buy the life insurance unit of Barclays Plc as Chief Executive Officer Jacques Aigrain seeks to bolster profit that has been eroded by falling markets and lower premiums. The second-quarter writedowns are on top of more than 2 billion francs in losses announced since November on credit default swaps written to protect a client's investment.

``I consider the Barclays acquisition a defensive deal done at an acceptable price,'' said Birgit Roeper-Gruener, an analyst at Societe Generale SA in London who recommends selling the shares. ``We are skeptical about Swiss Re's ability to steer through the softening reinsurance market.''

Swiss Re rose 1.25 francs, or 1.9 percent, to 66.65 francs. The shares have fallen 17 percent this year in Zurich trading, cutting the company's market value to 24.7 billion francs. Munich Re, the largest reinsurer, has also lost 17 percent.

Industry Losses

Munich Re dropped the most in five years in Frankfurt trading on July 25 after posting a 48 percent decline in quarterly earnings and warning of ``substantial'' losses on stock investments, which account for about 7 percent of its assets. Hannover Re said falling investments will make reaching targets ``difficult.''

Swiss Re is taking over about 760,000 life insurance and pension policies of Barclays Life Assurance Company Ltd., representing about 6.8 billion pounds ($13.3 billion) in invested assets, for 753 million pounds in the largest transaction for its Admin Re unit. The company will continue to buy back shares under its current program, it said.

Admin Re, which contributed a fourth of life and health revenues in 2007, has bought more than 50 closed blocks of life and health insurance since 1998 to use capital not needed for new contracts. Today's acquisition will add to earnings and is expected to reach a return on equity in excess of Swiss Re's over-the-cycle target of 14 percent, Aigrain, 53, and Chairman Peter Forstmoser said in a letter to shareholders.

Excess Capital

The return on equity target would be ``difficult'' to achieve this year, Chief Financial Officer George Quinn said in an interview. Return on equity was 8.4 percent in the first half.

The company, which had 6 billion francs to 7 billion francs in excess capital at the end of June, aims to spend a ``significant proportion'' on purchases of closed books of life insurance policies to boost shareholder returns, Quinn said.

``We see a lot of opportunities in the market'' to expand the Admin Re business, Quinn said. ``Some are even larger than the transaction announced today.''

Expansion at the Admin Re unit comes as premium rates at the property and casualty unit are falling in the absence of major insured natural catastrophes over the past two years. Swiss Re gets more than half its premium income from helping shoulder property-and-casualty risks for insurers such as Munich-based Allianz SE and Axa SA of Paris.

`Difficult Situation'

The property and casualty unit saw a 29 percent drop in premiums to 3.45 billion francs, and premium income at the life and health division declined 14 percent to 2.66 billion francs.

The reinsurer forecast in February that its 2008 combined ratio, a measure of profitability in underwriting property-and- casualty risk, may worsen to 96 percent from 90.2 percent because of lower premiums after January policy renewals fell 12 percent by volume. The ratio was at 94.7 percent in the first half.

``The reinsurance industry is in a difficult situation,'' said Vasilis Katsipis, an analyst at A.M. Best Co. ``Rates are dropping and at the same time investment income is decreasing, and that is going to affect the industry throughout the year.''

Pretax profit at the financial markets unit dropped 62 percent to 951 million francs because of the writedowns. Swiss Re, which in April hired Credit Suisse Group AG's David Blumer to replace former U.S. Federal Reserve Governor Roger Ferguson as head of the unit, said it estimates further losses of 163 million francs on the credit default swaps in July.

More Writedowns

``CDS writedowns will certainly remain a topic at Swiss Re for the next two or three quarters,'' said Thilo Gorlt, a Frankfurt-based analyst at BHF-Bank AG.

Credit-default swaps are contracts designed to protect bondholders from nonpayment. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Swiss Re's remaining risk related to structured credit- default swaps fell to 2.21 billion francs at the end of the second quarter, of which 482 million francs are linked to subprime and alt-A mortgages. The company said last month it had $9.6 billion of corporate debt from Freddie Mac and Fannie Mae, the beleaguered U.S. mortgage-finance companies.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: August 5, 2008 13:07 EDT