Swiss Re takes a £525m hit on credit derivatives

Swiss Re, the world's biggest reinsurer, became the latest victim of the sub-prime meltdown yesterday as it announced a SFr1.2bn (£525m) loss on two credit default swaps.

Shares of the world's biggest reinsurer dropped more than 10 per cent on the news, which weighed on the European insurance sector. The insurer sold the complex credit instruments to clients seeking to protect themselves against falls in mortgage-backed investments.

The investment portfolios the insurance was sold for included collateralised debt obligations (CDOs), which are bundles of bonds of differing quality and include securities backed by mortgages. The value of CDOs collapsed after mortgage defaults rocketed in the US. "We clearly made some poor choices," said Roger Ferguson, the head of Swiss Re's financial services business.

The company's finance director, George Quinn, said Swiss Re had carried out "a very detailed and exhaustive review to ensure we don't have any further exposure, and we do not". He said the credit default swaps were not sold aggressively. But investors voiced disapproval of the company's losses in complex financial markets, which are not part of its historically core business of insuring other insurers against losses.

Before the market meltdown in August, the parcelling up of assets to be sold on to investors and the rise of derivatives to protect against market swings were said to have brought greater stability to the financial system. But the dispersal of risk around the world has made it difficult to spot who ultimately holds the risk of market downturns.

Swiss Re cut its valuation of the CDOs to zero and of sub-prime securities to 62 per cent of their original value. It said most of the holdings were investment grade, but that further downgrades could come.

Credit default swaps are contracts designed to protect bondholders from falling asset prices. Swiss Re said the products had been structured to protect against a "remote" risk of loss, making it the latest financial institution to have assumed that the booming credit markets that froze in the summer were safe and reliable.

The news came as jitters about the fallout from the credit crunch increased. Josef Ackermann, chief executive of Deutsche Bank, said big write-downs on credit assets by US banks such as Citigroup had unnerved the market.