Warren Buffett, the billionaire investor, bought 3 per cent of Swiss Re and assumed a fifth of its property and casualty insurance business yesterday.

Mr Buffett, known as the Sage of Omaha, paid about SwFr900 million (£423 million) for the reinsurer’s shares, which have fallen by about a quarter since mid-November. The plummet came as the group said that it had lost SwFr1.2 billion on insurance it sold to an unnamed financial institution to cover falls in the value of the policy owner’s “sub-prime” bond portfolio.

Swiss Re was among the leading fallers of European insurers during the widespread share sell-off on Monday, dropping by 7 per cent as the fortunes of the bond insurers that it underwrites continued to suffer.

UBS predicted this week that Swiss Re would take “material losses” on the remaining SwFr2.8 billion exposure that it had to monoline insurers, who guarantee to pay the interest and principal on the bonds they underwrite. UBS lowered its 2008 profit forecast for Swiss Re by SwFr500 million.

The monoline insurers also occasionally cover declines in the value of the bonds and they face a rise in claims as the rate of defaults on mortgages that support the bonds continues to rise.

About 17 per cent of Swiss Re’s monoline exposure is with Ambac, which last week became the first bond insurer to lose its AAA credit rating amid fears that it would not be able to meet its liabilities. MBIA, the world’s biggest bond insurer, is another big Swiss Re customer.

Analysts said that the deal with Mr Buffett showed that Swiss Re felt the need to protect its balance sheet and that he could not expect further big setbacks from the sub-prime crisis. The shares rose by SwFr2.75, or 2.75 per cent, to SwFr76.35.

Mr Buffett’s investment and his agreement to assume 20 per cent of Swiss Re’s property and casualty insurance business for five years will allow the group to increase its share buyback programme by SwFr1.75 billion.

Jacques Aigrain, chief executive of Swiss Re, said: "This arrangement is further evidence of our commitment to actively manage the property and casualty cycle in the best interests of our shareholders. The additional capital efficiency will permit Swiss Re to retain flexibility in a softening property and casualty market.”

Shares in monoline insurers and, to a lesser extent, Swiss Re benefited after the New York insurance deparment, which regulates the state’s insurance industry, pledged to help to prop up bond underwriters. Eric Dinallo, the department’s superintendent, said that he was talking to “other parties about possible future capital investment” in bond insurers. The department issued a licence to Mr Buffett in December to start his own bond insurer.

Berkshire Hathaway, Mr Buffett’s investment vehicle, owns Geico, the car insurer, and General Re, the reinsurance group.

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