Swiss Re’s credit solutions division had put together protection to insure an unnamed company against a “remote risk of loss” — a loss that materialized after Standard & Poor’s and Moody’s Investors Services slashed the ratings of a variety of debt instruments last month and as liquidity dried up in more exotic asset classes. The portfolios had exposure to subprime mortgages and, worse from the reinsurer’s view, asset-backed collateralized debt obligations, which are portfolios of various debt securities. A number of companies, including funds run by Bear Stearns and General Electric, have reported similar losses on such CDOs. Shares of Swiss Re dropped 5.2% in early Swiss trading.
According to Markit Group, an index tracking the value of AAA-rated subprime mortgage-backed bonds has dropped 20% over the last month. Swiss Re has written the value of the CDOs to zero, and the subprime securities down by 62%. The value of the portfolio, which was worth over 5 billion francs, is now 3.6 billion francs after October. The transactions continue to be exposed to market value changes, but Swiss Re says marking the CDOs down to nothing will mitigate further losses. Swiss Re emphasized that these were not rogue trades – “the transactions were approved by the relevant internal risk committees with the appropriate levels of delegated authority,” the company said. The speed of the financial market deterioration and size of the loss, however, means the firm needs “more pro-active management,” and it has taken steps to ensure this. Swiss Re said it’s committed to its share buyback program and held to its earnings and return-on-equity targets. (marketwatch)
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