May 6 (Bloomberg) -- Swiss Reinsurance Co., the world's biggest reinsurer, said profit fell a more-than-estimated 53 percent after a decline in premiums and 819 million Swiss francs ($782 million) of credit market writedowns.

Swiss Re dropped 4.8 percent in Zurich trading after the company said it will book a further 200 million francs of writedowns because of ``the difficult market environment.'' First- quarter net income declined to 624 million francs, or 1.84 francs a share, falling short of the 871 million-franc estimate of nine analysts surveyed.

``Credit losses are unexpectedly high,'' said Viktor Dammann, an analyst at Bank Vontobel in Zurich with a ``hold'' rating on the stock. ``I'd rather hoped to see some stabilization in this market, but this stuff is on the books and you just can't get rid of it.''

Chief Executive Officer Jacques Aigrain said today that the Zurich-based reinsurer's capital position remains ``strong'' amid turmoil in the financial markets even as derivatives-related losses increase. Reinsurance rates, which soared after Hurricane Katrina struck the U.S. Gulf Coast in 2005, have fallen for two years and caused premium income to drop 20 percent in the first three months of 2008, twice as much as analysts predicted.

Chief Financial Officer George Quinn raised the possibility that Swiss Re may not meet its profit growth target of 10 percent and return on equity of 14 percent. ``Given the writedown we suffered last year, we have to increase earnings faster,'' he said. Still, Quinn said ``our targets are unchanged.''

The market losses were caused by what Quinn called ``restructured credit-default swaps in run-off.'' Today's writedown announcement follows a 1.2 billion-franc loss on credit-default swaps announced in November, raising Swiss Re's total writedowns to more than 2 billion francs in less than six months.

In February, the company had forecast an additional 240 million-franc writedown in the quarter on credit default swaps.

Shares Drop

Swiss Re fell 4.20 francs to 83.45 francs after dropping as much as 6.4 percent, giving it a 31 billion-franc market value. The stock has risen 3.7 percent this year compared with an 8.9 percent drop by the 27-member Bloomberg 500 Insurance Index.

Hannover Re, Germany's second-biggest insurer after Munich Re, has gained 12 percent in the same period. Hannover Re today reported first-quarter profit rose 23 percent on lower catastrophe claims. Premium income at Swiss Re fell by 12 percent during contract renewals in January compared with a 4 percent cut at rival Munich Re, which reports first-quarter results on May 8.

Founded in 1863

Founded in Zurich in 1863, Swiss Re said its combined ratio, a measure of profitability, worsened by 3.1 percentage points to 96.9 percent from the first quarter a year ago. Operating income at its property and casualty division dropped 6 percent, mainly on lower premium volumes. Swiss Re earns almost two-thirds of its premium income from its non-life business.

Swiss Re said natural catastrophe claims were similar to a year earlier due to an absence of major costs from hurricanes and other disasters in spite of snowstorms in China, flood damage in Australia and the European winter storm Emma.

Operating profit at the life and health division fell 45 percent compared with what the company said was a strong first- quarter in 2007 as the financial markets division where Swiss Re booked its credit-related writedowns reported operating income of 1.4 billion francs. ``While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities,'' the reinsurer said in a statement.

Billions at Risk

The company has 2.76 billion francs at risk in so-called structured credit-default swaps, Quinn said on a conference call. Long-term ratings on Swiss Re were unaffected despite the further writedown, Standard & Poor's said today.

``The loss continues to be manageable in the context of both the group's earnings and its capital position,'' S&P analysts including Peter Grant said from London.

Swiss Re's financial strength is rated ``Aa2'' with a ``stable'' outlook at Moody's and ``AA-'' with a ``stable'' outlook by Standard & Poor's.

Credit-default swaps on Swiss Re rose 2 basis points to 80, according to JPMorgan Chase & Co. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

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.

Deutsche Bank AG analysts had estimated structured CDS losses at Swiss Re of 400 million francs, Helvea expected a 300 million- franc writedown while UBS AG forecast about 500 million francs.

``The writedowns were very, very high'' and ``it's not quite clear where they are headed,'' Stefan Scharff, managing partner at SRC Research in Darmstadt, Germany, said of Swiss Re.

Blumer, Ferguson

Swiss Re hired Credit Suisse Group's David Blumer last month to replace former U.S. Federal Reserve Governor Roger Ferguson as head of financial services, the unit in charge of the writedowns.

The company this year signed over 20 percent of its property and casualty business for the next five years to Warren Buffett's Berkshire Hathaway Inc. That cut 300 million francs from premium income, which fell 20 percent to 6.46 billion francs.

The U.S. dollar's 7.6 percent drop this year against the franc eroded the value of dollar-based premiums. The dollar reached a record low against the franc on March 17. While ``the bulk'' of Swiss Re's business is in foreign currencies, especially the dollar, since the start of April the company estimates ``about half the effect has reversed,'' Quinn said on a conference call.

Swiss Re gets more than half its premium income from helping insurers such as Munich-based Allianz SE and Axa SA of Paris shoulder risks. It has used capital freed up by the agreement with Berkshire for a 1.75 billion-franc share buyback started in March and scheduled to run for at least two years.

Profit Estimates

Estimates for Swiss Re's net income had ranged from 613 million francs to 1.095 billion francs compared with 1.33 billion francs a year earlier. Premium income was expected to fall 9 percent to 7.4 billion francs, Bloomberg's survey showed last week.

``The key question is how Swiss Re aims to position itself in new markets such as Asia to make up for a downturn in the U.S. market,'' Scharff said in an interview from Frankfurt.

In response to slowing premium income, Swiss Re is focusing business development on economies such as China, India and South Korea, which it estimates will contribute about 20 percent of its business in five years, compared with 11 percent now.

Swiss Re is also increasing its life and health insurance businesses, providing investment-bank style services to insurers and stepping up sales of insurance-linked securities such as catastrophe bonds, which let hedge funds and other investors spread insurance risks and returns.

Through its Admin Re unit, Swiss Re has bought more than 50 groups of insurance policies that no longer write new business, adding at least 75 billion francs in assets to its balance sheet.

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

Last Updated: May 6, 2008 11:53 EDT