Zürich-based reinsurer Swiss Re announced it had booked a mark-to-market loss of SFr819 million ($781 million) on two portfolio credit default swaps (CDSs) in its first-quarter results on May 6, and warned that it was likely to lose another SFr200 million on the trades during April.
The same trades, referencing a trading portfolio that includes US subprime mortgages, were also responsible for a SFr1.2 billion loss at the reinsurer in November last year. This brings the total damage done by the two contracts to over SFr2 billion.
The portfolio CDSs were structured for a single unnamed client in 2006 and 2007, with a total notional value of SFr5.12 billion. They reference a trading portfolio of mortgage-backed assets managed by a third party, including residential and commercial mortgage-backed securities and collateralised debt obligations of asset-backed securities.
The trades were designed to attach at super-senior level and have an economic lifespan of five years, according to Swiss Re. The firm said the positions were in run-off, implying it is still exposed to assets already in the underlying portfolio but will not take exposure to any new assets.
As of October 2007, the company stated the mark-to-market value of the portfolio was 68.4% of its par value. By March 31, it had depreciated to 53.9% of par, causing a further mark-to-market loss.
The portfolio CDSs appeared to be largely responsible for a 53% decline in net revenue at Swiss Re from the same quarter in 2007, to SFr624 million.
A spokesman for the reinsurer reiterated a statement made by chief executive Jacques Aigrain in November last year, saying: “We took immediate action to strengthen our risk-taking and we are not writing any additional structured credit derivatives transactions.”
More on Structured Products
ECB rate cut to drive modest recovery in eurozone
Correlation sensitivity in multi-asset structured products explained
UK investors offered autocallable in conservative or bullish versions
Schlumberger product puts capital at risk if American barrier is breached
Sign up for Risk.net email alerts
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
Isda directors warn on fragmentation, access and liquidity - but expect problems to pass
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.