Swiss Re reports CHF$1.2-billion hit arising from subprime fallout

Swiss Re has reported a CHF1.2-billion, pre-tax, mark-to-market loss (about Cdn$1.058 billion) resulting from the U.S. subprime mortgage fallout.
The reinsurer made its announcement following completion of its 2007 Q3 performance report.
Swiss Re reported the loss came as a result of 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.
These investment grade credit default swaps were structured to provide protection against a remote risk of loss, Swiss Re noted in a public statement. The unprecedented and severe ratings downgrades undertaken by the rating agencies in October and the lack of any truly liquid market for these securities resulted in a significant and material reduction of the value of the underlying assets.
Swiss Re said the portfolios being protected via credit default swaps consisted largely of mortgage-backed securities in various forms, including residential and commercial mortgage-backed securities.
Although the majority of the exposure is to prime and mid-prime securities, Swiss Re noted, there is exposure to sub-prime and more importantly to asset-backed securities (ABS) in the form of collateralized debt obligations or CDOs.
The transactions were approved by the relevant internal risk committees with the appropriate levels of delegated authority, Swiss Re said. The speed of the financial market deterioration and the size of the loss underlines the need for a more pro-active management of this type of financial market transactions. We have taken steps to ensure this.