One of the largest losses to date from the ongoing subprime crisis was announced by Swiss Reinsurance Co., Zurich, on Nov 19 when it said it expects a loss of US $1.08 billion due to credit underwriting activities related to mortgage-backed securities.
Swiss Re said the loss was due to exposure to 2 related credit default swaps written by its Credit Solutions unit that provide protection for a client against a decline in the value of portfolio assets.
The portfolios were protected through credit default swaps that consist largely of both residential and commercial mortgage-backed securities. The majority of exposure, according to Swiss Re, is from prime and mid-prime securities, but there is exposure to sub-prime and asset-backed securities in the form of collateralized debt obligations.
Swiss Re says it has marked down these asset-backed securities CDOs to $0. 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 US $3.24 billion.
The company says the speed of the financial market deterioration and the size of the loss speaks to the need for more proactive management and that steps have been taken to ensure this in the future.
Two major rating agencies, Moody’s Investors Service and Standard and Poor’s Corp., both in New York, said the company’s ratings will not be affected.
Fitch Ratings, also in New York, had not issued new guidance at press time.
S&P currently has an ‘AA’-/Stable and A-1+ financial strength and counterparty ratings. The ratings will not change at the present time because:
–the loss falls within the group’s articulated tolerance for credit risk.
–it is “manageable in the context of the group’s very strong underlying earnings for the year to date.”
–”the asset valuation approach adopted by Swiss Re appears conservative, so no further material adverse development is expected over the medium term.”
In commenting on why it maintained Swiss Re’s ratings, Moody’s said the loss was restricted to two specific CDS transactions, adding it understands that the degree of exposure to similar asset classes elsewhere in the group is small.
Although the loss is “substantial,” Moody’s said it did not exceed expected earnings for the 4th quarter of 2007.