Nov. 4 (Bloomberg) -- Swiss Reinsurance Co., the world's second-biggest reinsurer, posted its first loss in almost six years and suspended a share buyback program after wrong-way bets on credit-default swaps.

The third-quarter loss was 304 million Swiss francs ($259 million) after net income of 1.47 billion francs a year earlier. Swiss Re gained in Zurich trading after Standard & Poor's said the loss was ``within expectations'' and didn't threaten the company's credit rating.

The reinsurer has been plagued by losses on contracts sold to protect clients against declines in fixed-income securities after the worst U.S. housing market since the Great Depression sparked a global credit crunch. Swiss Re booked 289 million francs of writedowns on credit default swaps in the third quarter, bringing losses in the past year to 2.81 billion francs. U.S. insurer American International Group Inc. needed an $85 billion government bailout after losses on similar products.

Today's writedown is ``only the tip of the iceberg,'' said Fabrizio Croce, an analyst at Kepler Capital Markets in Zurich who has a ``reduce'' rating on the stock.

Swiss Re gained 11 percent to 56.45 francs in Zurich trading, paring its decline this year to 30 percent. The stock earlier dropped as much as 8.2 percent. The 31-member Bloomberg Europe 500 Insurance Index climbed 7.1 percent, bringing this year's decline to 39 percent.

Investment Losses

``Despite the likelihood of further material writedowns'' in the fourth quarter, Swiss Re holds enough surplus capital to maintain its AA- rating, Standard & Poor's analyst Peter Grant wrote in a note.

The insurer's ``excess capital'' was between 4.5 billion and 5 billion francs by mid-October, down from between 5 billion and 5.5 billion francs at the end of the quarter, Chief Financial Officer George Quinn said on a conference call with analysts.

While Swiss Re suspended its 7.75 billion franc share buyback, it can still complete the program by April 2010, if stability returns to capital markets, the company said.

Halting the buyback is ``the prudent thing to do given current market environment,'' Quinn said in a television interview. ``We don't need'' to raise more capital, he added.

The buyback was 51.2 percent complete at the end of October, the Zurich-based reinsurer said.

Hurricane Costs

The insurer, founded in 1863, reported investment losses of 1.5 billion francs in the quarter, even as Chief Executive Officer Jacques Aigrain increased hedging against corporate credit risk. Swiss Re cut investments in corporate bonds through hedging, reducing the notional value of its portfolio to zero at the end of September from 25.7 billion francs three months earlier.

The company said the annualized cost of hedging its corporate bond portfolio was 470 million francs.

``There are big distortions from investment losses, as expected,'' said Tim Dawson, an analyst at Helvea in Geneva who rates the company ``neutral.''

Credit-default swaps, designed to protect bondholders from nonpayment, 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.

AIG Bailout

AIG received a Sept. 16 government bailout after credit rating downgrades sparked a liquidity squeeze and almost forced the largest U.S. insurer into bankruptcy. AIG sold protection on $441 billion of fixed-income investments, including $57.8 billion in securities tied to subprime mortgages. The swaps plunged in value as the assets they guaranteed declined.

AIG's woes came as Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection on Sept. 15. Swiss Re reported in September that it had a total of 250 million francs of exposure to AIG and Lehman.

Banks and financial companies worldwide have raised about $689 billion in capital and posted about $685 billion of credit losses and markdowns since the start of 2007, data compiled by Bloomberg show.

Swiss Re reiterated a target for earnings-per-share growth of 10 percent and a return on equity of 14 percent ``over the cycle.''

It reported a third-quarter loss per share of 93 centimes, after earnings per share of 4.20 francs, a year earlier. The median estimate of eight analysts was a 150 million-franc profit.

The reinsurer, which started quarterly reporting in 2007, last posted a loss for the full year of 2002.

Munich Re

Munich Re, the world's biggest reinsurer, may report a 91 percent decline in third-quarter profit to 112 million euros ($142 million) on investment writedowns and hurricane claims, according to the median estimate of 15 analysts surveyed by Bloomberg.

Net insured claims from hurricanes Ike and Gustav cost the company $365 million, Swiss Re said.

On the asset side, Swiss Re had a total of 39.9 billion francs invested in structured products, compared with 38.9 billion francs at the end of June, it said, as currency effects increased the value of the portfolio.

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net

Last Updated: November 4, 2008 11:41 EST