Swiss Reinsurance Co. reported an 87 percent drop in fourth-quarter net profit on Friday, blaming massive write-downs linked to bad loans.
The world's largest reinsurer said its net profit during the three months to December was 170 million Swiss francs (US$161.7 million; euro106.9 million) compared with 1.3 billion francs in the year-earlier period.
The Zurich-based reinsurer said a 1.2 billion franc pretax loss reported in November hit its bottom line, and it expects further write-downs of some 240 million francs (US$228.3 million; euro151 million) in the current year.
The losses were the result of credit default swaps gone bad, Swiss Re said.
Credit default swaps are usually bought by bond investors, who seek insurance against potential market losses. When bonds lose their value fast, the insurer has to pay out claims that help investors recover some losses.
Swiss Re said the business unit at which the losses occurred was marginal to its credit underwriting operations and would be closed down.
"We have learned from the mistake and are confident that we have a stronger organization as a result," the company said in a statement.
A New York law firm on Wednesday announced it was organizing a class action lawsuit on behalf of U.S. investors who lost out when Swiss Re share prices dropped sharply following writedowns.
Coughlin Stoia said Swiss Re violated U.S. Securities Exchange Act rules by providing misleading information about its financial condition, a charge the company denies.
Premiums in Swiss Re's property and casualty division rose 2 percent, reflecting the inclusion of General Electric Co.'s reinsurance unit which it acquired in 2006 for around US$8 billion.
In 2007, premiums from property and casualty insurance reached almost 19 billion francs (US$18 billion; euro12 billion) compared with 18.5 billion francs a year, the company said.
As a result, Swiss Re's combined ratio _ an industry benchmark that compares costs and claims to premium income _ improved by 3 basis points to 90.2 percent from 90.5 percent the previous year. A level below 100 percent means the business is profitable.
The group's overall net income, including its financial business and life and health insurance, fell 9 percent to 4.16 billion (US$3.96 billion; euro2.62 billion) from 4.56 billion in 2006. Analysts had expected full-year profit to be closer to 4 billion francs (US$3.81 billion; euro2.52 billion).
Investors responded positively to the results, with Swiss Re shares rising 4.9 percent to 83.90 francs (US$80.03; euro52.93) on the Zurich exchange. The company said it would propose increasing its dividend by 18 percent to 4 francs (US$3.81; euro2.52) from 3.40 francs in 2006.
Reinsurance companies sell backup coverage to other insurers, spreading risk so the system can handle huge losses from major disasters.