Credit Suisse bailout for insurance arm

Credit Suisse, the Swiss financial services giant, yesterday showed more signs of distress as it injected a further 2bn Swiss francs (£866m) into its struggling insurance arm and warned its investment banking business would make an operating loss in the third quarter.

Winterthur Insurance required the financial lifeboat because of falling equity markets, the company said. Credit Suisse has already ploughed Sfr2bn into Winterthur earlier this year due to a decline in the value of its equity portfolio.

Dealing with mounting liabilities was not a situation Credit Suisse anticipated when it bought it in 1997 as a potential cash cow. Instead of being able to use its balance sheet to grow other parts of the company, Winterthur has become a drag on its finances.

The entire insurance industry in the UK and abroad has suffered from the drop in share prices, because their assets have been eroded. But analysts believe Winterthur has suffered more than some because it is saddled with a high number of policies on its books which promise to pay a fixed sum to policyholders when their investment matures.

Credit Suisse said in a statement: "Winterthur has substantially reduced its equity exposure to mitigate the impact of international equity market volatility." But it added that the group's third quarter results would nonetheless be hit by a "significant net loss" in the insurance business.

The tough market conditions would also impact the US-based investment bank, Credit Suisse First Boston, the company added. It prepared markets for a bleak third-quarter earnings report that would have only a glimmer of positive news about the company's private bank and Swiss commercial and retail banks, which are on course for a strong performance. Credit Suisse's problems this year have extended beyond Winterthur. It has also suffered bigger losses from its investment banking arm than some of its major rivals, sending its shares down more than 50 per cent this year.

Lukas Mühleman, Credit Suisse's chief executive and chairman, has had to pay the price for the problems by agreeing to step down in December.

Mr Mühleman was criticised for his strategy of expanding into bancassurance, which included buying Winterthur, because opportunities to cross sell products within the group have been much more limited in the current tough market conditions than had been anticipated.

Mr Mühleman's joint successors are Oswald Grübel, head of the financial services division that includes Winterthur, and CSFB investment bank head John Mack.