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Zurich Financial Sees No Subprime Debt Surprises

Zurich Financial Services has enjoyed a positive performance in its bond portfolio in the past two months with no surprises from its subprime exposure, Chief Executive James Schiro said on
Friday.

Zurich said on Aug. 16 it had invested $340 million in U.S. subprime debt and $479 million in collateralised debt obligations (CDO), which are at the heart of recent turmoil in global credit markets.

"We've not had any surprises to report on the subprime," Schiro told Reuters. "We don't face the issues of the liquidity crisis like some others do."

Speaking on the sidelines of a meeting of the World Economic Forum, Schiro said there was bound to be a backlash from the subprime meltdown, just as there was after the U.S. savings and loan crisis in the late 1980s and the collapse of energy trader Enron.

"Obviously you'll see something," Schiro said. "It's logical to assume that something will change."

He mentioned greater disclosure as one possible outcome and noted that the European Union was planning to examine the role played by ratings agencies, which assigned top-notch grades to mortgage-backed securities and financing vehicles that turned out to be far from risk-free.

"You may be seeing people asking what kind of disclosure do you have around these vehicles," Schiro said.

But he said it would be a mistake to condemn securitisation of home loans outright.

"Do you throw the baby out with the bathwater? I think you have to fix the problem. I don't think you suddenly say, 'Okay, no more packaging of mortgage portfolios.' Why would you do that if the quality of the paper is good?" Schiro asked.

"Companies have been packaging and selling mortgage portfolios for a long time. It's just the underlying quality of the paper in it that's causing the issue," he added.

Nor was there a need to respond by offering blanket protection to buyers of mortgage-backed securities; investors had a responsibility to know what they are buying.

"These were not small investors buying these products, and they were not sophisticated," Schiro said.