Swiss Re reported an $878 million loss from its exposure to credit default swaps related to the subprime market crisis.
The Zurich, Switzerland-based reinsurer said in its October performance report it had a $1.07 billion mark-to-market loss before taxes–stemming from its exposure to two credit default swaps written by its Credit Solutions unit.
The company said the swaps provide protection for a client against a fall in the value of a portfolio of assets.
Standard & Poor's Ratings Services agreed and said that the company's rating is unaffected by the loss.
The assets are connected to a series of collateralized debt obligations (CDO) and other investment vehicles that have suffered downgrades since the start of the subprime crisis earlier this year. The company reported that the market value of asset backed securities (ABS) CDO was written down to zero.
During one of several phone conferences the company held today, executives said the event would not have a material effect on the company's earnings.
Jacques Aigrain, chief executive officer for Swiss Re, said the company was making adjustments to deal with the impact of the loss and to avoid a similar incident in the future.
"A loss of this magnitude will always give rise to lessons we can apply to strengthen and improve the processes," said Mr. Aigrain.
He said there was no problem with taking the risk or the process used, but he added "it is clear we made some poor choices" and the company is undergoing a review to improve the process and avoid a repeat of such a loss.
Mr. Aigrain said the loss was from events that were not foreseeable and "unprecedented downgrades in October."
In addition to the ABS CDO write down to zero, the subprime securities were written down 62 percent from their original value to $817 million.
The total value of the portfolio is now at $3.2 billion, Swiss Re said.
Earlier this month the company reported net earnings for the third quarter were down 5 percent, or CHF (Swiss Franc) 81 million ($73 million at current exchange rate), to CHF 1.47 billion ($1.32). That was on a 4 percent drop, or CHF $299 million ($268 million), in the total premium earned of CHF $7.8 billion ($7 billion).
Swiss Re's property-casualty combined ratio increased 3.1 points to 86.5.
For the first nine months of the year, Swiss Re said net income was up 23 percent to $4 billion. The company said it expects to end the year with positive earnings results and Mr. Aigrain said today's announcement would not change that outlook.
S&P said the company's AA minus/Stable/A-1 plus ratings are unaffected. Despite its magnitude, "while the loss was unexpected" Standard & Poor's said there would be no negative ratings action because it is within the group's articulated tolerance for credit risk and the group has "very strong underlying earnings for the year to date.
The rating firm noted the group is still expected to meet its 13 percent target return on equity for the year and "no further material adverse development is expected over the medium term."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.