Swiss Re on Thursday turned to Warren Buffett, the legendary US investor, for SFr3bn ($2.6bn) in fresh funding and cut its dividend to virtually nothing as it struggled to retain its investment-grade credit rating.

The deal, which will pay Mr Buffett hefty annual interest and give him the right to raise his stake at an attractive price, is a sign that the billionaire investor has not lost his appetite for financial stocks. Mr Buffett has suffered paper losses on most of his portfolio of financial holdings, which include Goldman Sachs and American Express, as share prices in the sector have plummeted.

The Swiss reinsurer also reported a preliminary annual net loss of SFr1bn and scrapped its financial markets activities after increased writedowns on structured credit default contracts.

The results confirmed analysts’ worst fears. Swiss Re shares fell by 28 per cent to SFr21.70.

More than half of the SFr5bn Swiss Re may raise will come from Berkshire Hathaway, Mr Buffett’s conglomerate. He already has a 3 per cent stake and could eventually own more than 20 per cent.

Berkshire’s holding, which is subject to Swiss Re shareholders’ approval, will probably be via a perpetual note paying annual interest of 12 per cent. The US investor will have the option in three years to convert into Swiss Re shares at SFr25.

The decision to raise capital followed Swiss Re’s admission that, at year-end, it was SFr1.5bn-SFr2bn below the level required to maintain its current AA credit rating. To preserve capital, the group intends to cut its dividend to SFr0.10.

Shareholders’ equity fell to SFr19bn-SFr20bn at year-end following unrealised losses on investments in the fourth quarter and exchange rate factors.

“We expected a profit warning but never thought the capital position would have been so desolate,” said Fabrizio Croce of Kepler Capital Markets.

“While the conditions set by Berkshire are outrageously bad for Swiss Re, the company and shareholders will probably have to accept them as there is no alternative.”

Apart from the injection from Berkshire, Swiss Re said it would raise further equity of up to SFr2bn, subject to market conditions.

“We are disappointed with our overall results in 2008, but our core business – Property & Casualty and Life & Health – are performing well”, said Jacques Aigrain, chief executive.

Swiss Re will publish full figures on February 19.