Swiss Re Marks Down $1 Billion on Subprime Mortgage Devaluation

November 19, 2007

Even the world’s largest reinsurer isn’t immune to the subprime mortgage crisis. Swiss Re announced that “following completion of its October performance reporting,” it is now obliged to report a “CHF 1.2 billion [$1.07 billion] mark-to-market loss, or CHF 981 million [$877.7 million] after tax.”

The announcement said the write downs arose from Swiss Re’s “exposure to two, related credit default swaps written by its Credit Solutions unit that provide protection for a client against a fall in the value of a portfolio of assets.”

While Swiss Re indicated that the default swaps had been considered “investment grade,” it explained that they had suffered “unprecedented and severe ratings downgrades undertaken by the Rating Agencies in October.” As a result there is now a “lack of any truly liquid market for these securities,” which has significantly lowered the value of the “underlying assets.”

The portfolios protected through the credit default swaps, “consist largely of mortgage backed securities in various forms including residential and commercial mortgage backed securities,” Swiss Re explained. “While the majority of the exposure is to prime and mid-prime securities, there is exposure to sub-prime and, more importantly, to asset backed securities (ABS) in the form of collateralized debt obligations or CDOs.

“Swiss Re has marked down these ABS CDOs to zero. The sub-prime securities have been written down to 62 percent of their original value. Other smaller adjustments have been made to the remainder of the portfolio. The market value of the portfolio is now CHF 3.6 billion [$3.22 billion].”

Swiss Re stressed that the transactions had been “approved by the relevant internal risk committees with the appropriate levels of delegated authority.” However, the Company recognized that this had perhaps been insufficient, given the “speed of the financial market deterioration and the size of the loss.” The event “underlines the need for a more pro-active management of this type of financial market transactions,” Swiss Re acknowledged. It also added that it has “taken steps to ensure this.”

CEO Jacques Aigrain took pains to explain that the Group’s “excellent performance” for the year to date “means that Swiss Re is able to absorb the extraordinary financial market developments in October.” He also acknowledged, however that “further improvement and reinforcement of our financial risk taking process is appropriate and we have taken immediate action to make the necessary changes.”

While Swiss Re indicated that these “transactions continue to be exposed to market value changes,” it also reaffirmed its commitment to “its previously announced share buy-back program and reiterates its over the cycle targets of EPS 10 percent and RoE of 13 percent.”

Source: Swiss Re –

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