First Big Re-Issuer Takes a Hit

The losses are beginning to show up in industries other than banking. There will be more of these to come over the next 12 months or so. One thing of note, all the press releases say there should be no additional losses announced assuming the conditions in the housing market do not deteriorate further. Hmmm. Text in bold is my emphasis. From Market Watch:

Swiss Re reported a shock 1.2 billion Swiss franc ($1.07 billion) writedown due to the subprime crisis, sending its shares down sharply and making it the first re-insurer to suffer a big, direct hit from the crisis.

The losses announced on Monday stemmed from protection Swiss Re sold to a client against a fall in the value of a portfolio -- underscoring the depth of the crisis and how it has hit financial firms like banks, insurers and hedge funds in often unexpected ways.

Rival Munich Re said it had nothing new to announce after the news, meaning Swiss Re may be alone among the big re-insurers to have taken a direct hit so far from the credit crisis.

The unexpected loss may raise questions about Swiss Re's push into novel investment bank-like services, a cornerstone of group strategy under Chief Executive Jacques Aigrain in a move to diversify away from its core business of providing insurance to insurers.

Swiss Re has conducted a thorough review of other credit default swap exposures and was satisfied it has no similar exposures, according to a slide presentation before a conference call with analysts.

Unprecedented and severe ratings downgrades by credit ratings agencies and the lack of a liquid market for the securities "has resulted in a significant and material reduction of the value of the underlying assets," Swiss Re said on Monday.

The speed of the financial market deterioration and the scale of the loss underscored the need for more proactive management of this type of financial market transaction, Swiss Re said, adding that it had taken steps to ensure this.

It said the securities remained exposed to market value changes but added that these were "substantially mitigated" by the group's conservative market value estimates for collateralized debt obligations (CDO) in the portfolio.

The investment-grade credit default swaps were structured to provide protection against a remote risk of loss, Swiss Re said in a statement. The portfolios protected via the credit default swaps consisted mainly of mortgage-backed securities.

While most of the exposure is to prime and mid-prime there is exposure to subprime and to asset-backed securities in the form of collateralized debt obligations (CDOs), Swiss Re said.

Swiss Re said it had marked down the CDOs to zero while the subprime securities were written down to 62 percent of their original value and other smaller adjustments were made to the remainder of the portfolio.