Swiss Re expects CHF 1.2 billion mark-to-market loss in the iSwiss Re expects CHF 1.2 billion mark-to-market loss in the income statement arising from its credit underwriting activities following the market deterioration in October
19 November 2007, Zurich
Following completion of its October performance reporting, Swiss Re has to report a CHF 1.2 billion mark-to-market loss, or CHF 981 million after tax, arising from its exposure to two, related credit default swaps written by its Credit Solutions unit that provide protection for a client against a fall in the value of a portfolio of assets.
These investment grade credit default swaps were structured to provide protection against a remote risk of loss. The unprecedented and severe ratings downgrades undertaken by the Rating Agencies in October and the lack of any truly liquid market for these securities has resulted in a significant and material reduction of the value of the underlying assets.
The portfolios being protected via these credit default swaps, consist largely of mortgage backed securities in various forms including residential and commercial mortgage backed securities. While the majority of the exposure is to prime and mid-prime securities, there is exposure to sub-prime and, more importantly, to asset backed securities (ABS) in the form of collateralised debt obligations or CDOs.
Swiss Re has marked down these ABS CDOs to zero. The sub-prime securities have been written down to 62% of their original value. Other smaller adjustments have been made to the remainder of the portfolio. The market value of the portfolio is now CHF 3.6 billion.
The transactions were approved by the relevant internal risk committees with the appropriate levels of delegated authority. The speed of the financial market deterioration and the size of the loss underlines the need for a more pro-active management of this type of financial market transactions. We have taken steps to ensure this.
“The excellent performance of the Group throughout the year to date means that 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” said Jacques Aigrain, Swiss Re’s Chief Executive Officer.
The transactions continue to be exposed to market value changes. This is substantially mitigated by the Group's conservative market value estimates for the ABS CDO part of the exposure, which is the most significant concern.
Swiss Re remains committed to its previously announced share buy-back programme and reiterates its over the cycle targets of EPS 10% and RoE of 13%.
Notes to editors
Swiss Re is the world’s leading and most diversified global reinsurer. The company operates through offices in more than 25 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “AA-“ by Standard & Poor’s, “Aa2” by Moody’s and “A+” by A.M. Best.
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Certain statements and illustrations contained herein are forward-looking. These statements and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forward-looking statements typically are identified by words or phrases such as "anticipate", "assume", "believe", "continue", "estimate", "expect", "foresee", "intend", "may increase" and "may fluctuate" and similar expressions or by future or conditional verbs such as "will", "should", "would" and "could". These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re's actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others:
- the impact of significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions, including, in the case of acquisitions, issues arising in connection with integrating acquired operations;
- cyclicality of the reinsurance industry;
- changes in general economic conditions, particularly in our core markets;
- uncertainties in estimating reserves;
- the performance of financial markets;
- expected changes in our investment results as a result of the changed composition of our invested assets or changes in our investment policy;
- the frequency, severity and development of insured claim events;
- acts of terrorism and acts of war;
- mortality and morbidity experience;
- policy renewal and lapse rates;
- changes in rating agency policies or practices;
- the lowering or withdrawal of one or more of the financial strength or credit ratings of one or more of our subsidiaries;
- changes in levels of interest rates;
- political risks in the countries in which we operate or in which we insure risks;
- extraordinary events affecting our clients, such as bankruptcies and liquidations;
- risks associated with implementing our business strategies;
- changes in currency exchange rates;
- changes in laws and regulations, including changes in accounting standards and taxation requirements; and
changes in competitive pressures.
These factors are not exhaustive. We operate in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
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