ZURICH - The world's second-largest reinsurer, Swiss Re , was more confident it could repay a costly convertible loan from Warren Buffett after strengthening its capital and returning to the black in 2009.

Net profit just missed expectations due to heavy losses on securitized products and corporate bond hedges, but capital bounced back from uncomfortable levels in the crisis to an excess of over 9 billion Swiss francs ($8.33 billion).

The balance sheet remains the key focus and in this regard Swiss Re's results are good, said Helvea analyst Tim Dawson.

Overall we believe that the good news from the balance sheet should help the shares to consolidate and extend their recent recovery.

Swiss Re, which had to reach for support from Buffett-owned competitor Berkshire Hathaway last year after losses on risky assets depleted its capital, expressed renewed belief in its business by hiking its dividend and re-establishing targets.

Capital excess at that level increases our confidence that we can achieve some of most important goals and these include the redemption of the Berkshire security in 2011, Chief Financial Officer George Quinn said on Thursday.

Shares in Swiss Re were 2.3 percent higher at 47.84 Swiss francs by 0930 GMT, outperforming a flat DJ Stoxx European insurance and 0.4 percent rise in bigger rival Munich Re .

The stock, battered by the financial crisis and risky investments, plummeted as low as 11.88 francs in March 2009 but has steadily regained ground since then, though it remains some way below a 2007 peak.

Swiss Re would now target a 12 percent return on equity over the cycle, reflecting lower investment returns as the company shifts to safer investments, said Chief Executive Stefan Lippe.

Lippe, appointed after the company turned to Buffett for a 3 billion franc convertible loan, has said Swiss Re will only go after the most profitable business, even if this means missing out on some sales.

His safety-first approach and low catastrophe payouts widened Swiss Re's operating margins, enabling it to reward shareholders with an improved dividend of 1.00 franc after it paid out only a nominal sum of 0.10 francs for 2008.

SOVERIGN DEBT RISK

Swiss Re increased its shareholder equity by 5.7 billion francs, giving it more breathing space as it targets a return to a coveted 'AA' credit rating lost in the crisis, and CFO Quinn said it had delivered on a promise to clients to boost capital.

It had very small sovereign debt exposure, Quinn said, after worries about Greek debt risk recently caused a temporary dip in the company's shares.

We have almost no exposure to Portugal and Spain. We have minimal amounts of exposure to Italy and for Greece at the end of 2009 we had less than 500 million Swiss francs and that would be the largest of those particular countries, said Quinn.

The bulk of the company's euro zone sovereign debt exposure was to Germany and France, he added.

Restored industry capital and the absence of hurricanes partially delayed the marked rise in prices many had predicted in the crisis from extra demand for reinsurance from primary insurers trying to shore up flagging capital, the company said.

Main competitor Munich Re beat expectations on February 2 after a fortuitous combination of low disaster claims and a financial market revival boosted its earnings.

Swiss Re's property and casualty reinsurance combined ratio -- a measure of underwriting profitability -- improved to 88.3 pct on lower catastrophe payouts, beating expectations, and the company said it would achieve a combined ratio of 93 percent in 2010, given a return to normal level of natural disasters. A number below 100 percent indicates operating profitability.

Impairments of 2 billion francs on securitized products and losses of 1.9 billion francs on corporate bond hedges hit full year profit, which came in at 506 million francs, against expectations for 534 million in a Reuters poll of analysts.

($1=1.081 Swiss Franc)

(Editing by Hans Peters)

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