The Sky Is Falling: As the Financial Crisis Continues to Devastate the Global Economy, the World's Largest Insurance Company and Former Largest Reinsurance Company Post Record Losses. Is an End in Sight?
O'Rourke, Morgan, Risk Management
While the financial crisis has touched every facet of the economy, few companies have been hit harder than AIG. The insurer posted a record $61.7 billion loss for the fourth quarter of 2008, eclipsing Time Warner's $54 billion loss in 2002. The loss equalled about $465,000 a minute during the 92-day period and capped a year in which the company lost $99.29 billion and saw its stock price virtually evaporate. In early March, shares of AIG that had been trading near $50 one year earlier were now worth only 40 cents--a 99% drop.
Nearly lost amid the news of AIG's financial failures and unending federal bailouts has been the bleak news from reinsurer Swiss Re. The company posted a 1.75 billion Swiss franc ($1.49 billion) loss in the fourth quarter of 2008, erasing an entire year's profits and causing an overall annual loss of 864 million Swiss francs ($735.3 million). The single-quarter loss was the largest in the company's history and the annual loss came in stark contrast to the 4.2 billion Swiss franc ($3.6 billion) profit posted in 2007.
The company has also seen its stock price plummet. As of the beginning of March, shares of Swiss Re had lost more than 80% of their value from the start of 2008. Stock that traded at 118.70 Swiss francs at its peak in April of 2007 had dropped into the 13 Swiss franc-range by February 2009.
Like AIG and many other companies, Swiss Re's losses can be attributed to the collapse of the housing market. The company had invested heavily in the securities market, particularly credit default swaps, in 2006 and 2007 in an effort to shore up profits in a stagnant reinsurance market. While it worked initially, the investments turned toxic when the financial crisis hit and Swiss Re lost billions. "We clearly made some poor choices," said Roger Ferguson, then Swiss Re's head of financial services, in 2007.
In 2008, signs of revival for Swiss Re were short-lived. In January, Warren Buffett and Berkshire Hathaway acquired a 3% stake in the company and took on 20% of the company's property/casualty business for the next five years. The market initially viewed this move as a vote of confidence from the Oracle of Omaha and, coupled with Swiss Re's pledge to buy back shares and "de-risk" its investment portfolio, it seemed that the reinsurer was out of the woods. …