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Swiss Re shares slump 10 percent on mortgage backed swaps loss

Swiss Re shares slumped over 10 percent today after the reinsurer announced a SFr1.2bn (£524mn) hit – SFr981mn after tax – on two credit default swaps linked to mortgage backed securities.

The swaps were written by the Swiss giant’s Credit Solutions unit, with losses identified after the company had completed its internal reporting for October.

The contracts cover a client against a fall in the value of a portfolio of assets, and were structured to “provide protection against a remote risk of loss”, said the reinsurer.

But according to Swiss Re, the “unprecedented and severe” ratings downgrades in October, combined with “the lack of any truly liquid market for these securities”, led to a “significant and material reduction of the value of the underlying assets”.

The company said the underlying portfolios protected by the credit swaps consisted of mortgage backed securities including residential and commercial mortgage backed securities.

It added that, while the majority of exposure related to prime and mid-prime securities, the swaps also covered sub-prime risk, including exposure to asset backed securities in the form of collateralised debt obligations (CDOs).

Swiss Re said it had marked down the ABS CDOs to zero, and written the sub-prime securities down to 62 percent of their original value.

The market value of the portfolio is now SFr3.6bn, it said.

The reinsurer added that it will more proactively manage similar financial market transactions in the future in response to the “speed of the financial market deterioration and the size of the loss”.

Despite reporting analyst beating third quarter net profits of SFr1.47bn, Swiss Re had reported a SFr113mn loss in its financial services division, primarily as a result of marking to market of its credit trading portfolio.

Shares in the company were down 10.1 percent to SFr87.70 at time of going to press.

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