Swiss Re said it had agreed to transfer a U.S. life reinsurance contract to Warren Buffett for 1.3 billion Swiss francs ($1.27 billion), allowing it to reinvest capital more profitably elsewhere.

Under the deal, the U.S. investor's Berkshire Hathaway will pocket premiums payable under the contract, while taking responsibility for paying up to $1.5 billion in potential claims, Swiss Re said on Monday.

The transfer will also release about 300 million Swiss francs in capital reserves for Swiss Re, which is trying to leverage its capital to squeeze as much profit out of underwriting as possible.

Shares in Swiss Re, the world's second-biggest reinsurer, were down 1.1 percent at 1458 GMT, lagging a 0.8 percent rise in the DJ Stoxx insurance index <.SXIP> and a 2 percent gain by sector leader Munich Re .

Swiss Re's situation has stabilized but top line and underlying profitability on the life side remain challenging, said Vontobel analyst Stefan Schuermann.

Berkshire pumped 3 billion Swiss francs into Swiss Re at the height of the global financial crisis after its Swiss competitor wrote off double that amount in toxic assets.

Analysts said Monday's deal confirmed Swiss Re's strategy of building its capital and focusing on high-margin business, while noting that it increased the company's exposure to Buffett.

SAFETY FIRST

We view the deal as another example of self-help as the company normalizes its capital and earnings position, said Collins Stewart analyst Ben Cohen.

Berkshire might be prepared to take higher investment risks with the 1.9 billion Swiss francs of assets held in the life business than Swiss Re, which is steering a safety-first course under new Chief Executive Stefan Lippe after the more flamboyant approach of his investment banker predecessor, Jacques Agrain.

Swiss Re could redeploy the capital the deal frees up in any part of the business, Chief Financial Officer George Quinn said on a conference call.

Probably the most attractive opportunities will be in larger in-force transactions or Admin Re transactions in a time when the primary insurance market is in quite a bit of trouble, added Swiss Re Life & Health head Christian Mumenthaler.

Swiss Re sees its Admin Re unit, which buys blocks of closed life and health insurance, as a source of high-margin business.

Swiss Re said the business it is passing to Berkshire Hathaway no longer met its investment threshold, and that transferring it would have boosted operating profit at its life unit by 40 million Swiss francs in the first nine months of 2009.

Getting rid of the contract will also reduce its financial exposure to lethal pandemics such as the swine flu outbreak by about 10 percent, the company added.

The deal is effective as of October 1, 2009, and will be reported by Swiss Re in the first quarter 2010.

Swiss Re said in November it would wait before repaying Buffett's costly convertible loan after it strengthened capital and beat profit forecasts in the third quarter.

(Additional reporting by Lisa Jucca in Zurich)

Warren buffett