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.”
The week on Risk.net, December 2–8, 2016Receive this by email