Swiss Re Sees Further SF277 Million CDS Writedowns

25 Sep 2008 • by Natalie Aster

Swiss Reinsurance Co., the world's second-largest reinsurer, estimated it lost 277 million Swiss francs ($256 million) on structured credit-default swaps since the end of the second quarter as the credit crisis deepened.

The mark-to-market loss on the contracts was 245 million francs in July and August and the Zurich-based reinsurer company expects a further 32 million francs through Sept. 19, it said today.

"What they've released today should be reassuring," said Tim Dawson, an analyst at Helvea in Geneva who has a "neutral" recommendation on the stock. The company has increased its hedges on corporate credit and the remaining risk related to credit- default swaps means that "even if it all goes to zero then in the greater scheme of things the loss is relatively immaterial."

Swiss Re posted a loss of 362 million francs related to credit-default swaps in the second quarter, following more than 2 billion francs in losses announced since November on derivatives written to protect a client's investment. The company said while it will remain exposed to market swings, it has "sufficient" liquidity even in periods when no external funding is available.

The reinsurer gained as much as 2.6 percent in Zurich trading and was 1.2 francs or 1.9 percent higher at 63.75 francs by 9:15 a.m., trimming this year's loss to 21 percent.

Swiss Re still had structured CDS for 1.95 billion francs at the end of August, priced at 42 percent of par value. Credit- default swaps are contracts designed to protect bondholders from nonpayment. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

CDS Market Shrinks

Credit-default swap dealers cut the volume of outstanding contracts for the first time in the six months through June amid efforts to reduce risks. The volume of outstanding trades fell to $54.6 trillion from $62 trillion, the International Swaps and Derivatives Association said yesterday. It was the first drop since ISDA started surveying traders in 2001.

"In the current market environment, we focus on ensuring the resilience of our investable assets and the underlying quality of our reinsurance business," Chief Executive Officer Jacques Aigrain said in the statement. "The difficult market conditions also create new opportunities."

On the asset side, Swiss Re had a total of 38.9 billion francs invested in structured products as of Sept. 19, down from 39.2 billion francs at the end of August. It cut its net equity exposure to 681 million francs from 913 million francs at the end of August, it said.

Source: Bloomberg