Swiss Re, the world's biggest reinsurer, became the latest casualty of the subprime debt crisis on Monday as it revealed a 1.2 billion Swiss franc ($1.07 billion) writedown related to credit default swaps.
Swiss Re said the losses stemmed from default protection written on portfolios mostly of mortgage-backed securities, underscoring the extent of the credit market turmoil that has hit financial firms like banks, insurers and hedge funds.
As Swiss Re shares fell over 8 percent, its Chief Financial Officer George Quinn called the writedown "deeply embarrassing," coming less than two weeks after it said its exposure to problems in the subprime mortgage market was limited.
"We didn't foresee the (credit ratings) downgrades that came in October," he said.
The group, which also said it had suffered an additional 300 million Swiss francs in writedowns in its own investment portfolio, said it would not rule out more charges to come but that it was comfortable with the writedowns to date.
"There are no similar transactions elsewhere in our portfolio," Quinn said in a conference call. "There is a risk of further downgrades in the portfolio."
The announcement raised concerns about the insurance sector in general, with the DJ Stoxx European insurers' index down 1.7 percent, even as rival Munich Re sought to restore calm. Swiss Re shares were down 7.9 percent at 89.85 francs, making it the biggest loser in the index of Europe's top 300 companies.
Munich Re, the world's second-largest reinsurer, said it had "nothing new to announce" since earlier this month when it called the subprime issue "harmless."
Shares in rivals Aegon, Allianz, AXA and Zurich Financial Services were all down over 2 percent, as the range of credit assets written down by Swiss Re raised worries that other insurers could be forced to follow suit, said one London-based analyst.
The writedown underscores how financial companies have been caught off-guard by unprecedented and sharp downgrades by credit ratings agencies and by the lack of liquidity in the credit markets. The problems have already resulted in more than $50 billion in losses.
Swiss Re's surprise loss casts a shadow over its push into financial 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's Financial Services division has always been a bit of a black box, and this loss will seriously erode outsiders' confidence in the risks that the group is running and the group's ability to control them," said brokerage Helvea in a note to clients.
"This bad news is likely to renew pressure for Swiss Re to stick to its knitting," he said.
But Quinn said he saw no need for a shake-up in Swiss Re's business strategy. "I don't see any need for any strategic change as a result of this," Quinn told a conference call.
"Financial services has for us been a key strategic thrust."
Swiss Re said it had conducted a thorough review of other credit default swap exposures and was satisfied it had no similar exposures elsewhere.
Swiss Re said it was virtually impossible to foresee the downgrades on AAA-rated investments, saying it was a once-in-30-year event. The effects those downgrades had on the value of the insured investments was only visible following a thorough review that ended at the weekend.
Swiss Re 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 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.
The company said it was still committed to a share buyback program and repeated its targets over the cycle of a 13 percent return on equity.
The writedown amounted to 981 million francs after tax, the company said. The market value of the portfolio is now 3.6 billion francs.