Swiss Re admits $1.07 billion loss on two portfolio CDSs

Zurich-based reinsurer Swiss Re has admitted a loss of SFr1.2 billion ($1.07 billion) caused by a fall in the market value of two credit default swaps (CDSs) referenced to a trading portfolio containing US subprime mortgages.

The CDSs were structured for a single unnamed client in 2006 and 2007, respectively, with a total notional value of SFr5.3 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 (CDOs of ABSs).

Swiss Re said the transactions were originally designed to attach at super-senior level, making the risk of losses relatively remote. But revisions to the fair value of the underlying portfolio – including marking down the value of the CDO of ABS tranches to zero – left the reinsurer with losses of SFr104 million from January to September 2007. Its October results revealed a mark-to-market loss of SFr1.2 billion pre-tax, or SFr981 million after tax.

The reinsurer would not reveal the duration of the two CDS contracts, but said they continue to be exposed to alterations in fair value.

Elsewhere, Swiss Re divulged it wrote down SFr300 million of assets due to the impact of mark-to-market fluctuations in October. These included almost SFr200 million of mortgage-backed exposures in its investment portfolio, as well as writedowns on super-senior corporate credit portfolio CDSs and its ABS trading book.

The disclosures come two weeks after Swiss Re announced net income of SFr1.5 billion for the third quarter. This is a reduction of 5% for the same period in 2006, but looks enviable compared to the losses reported by some derivatives dealers.

Chief executive Jacques Aigrain said: “The excellent performance of the group means Swiss Re is able to absorb the extraordinary financial market developments in October. Despite this, it is clear that further improvement and reinforcement of our financial risk-taking process is appropriate and we have taken immediate action to make the necessary changes.”

Among such actions, the reinsurer said it had performed a thorough review of CDS trades to which it is counterparty and was satisfied it had no similar exposures. It added it had strengthened the processes surrounding credit and financial market risk-taking, and “reinforced” active management of non-traded portfolios.

Previously on Risk News:
Bank of America's $19bn China windfall dwarfs $3bn writedown
Lower losses than feared at Barclays
HSBC takes $4.4 billion in write-downs on weak US credit
$400 billion losses on subprime, predicts Deutsche Bank
Wachovia declares $1.1 billion writedown for October