The fallout from the credit crisis finally hit the insurance sector today as Swiss Re declared a SwFr1.2 billion (£523.5 million) loss after paying out on protection that it had written against falls in the value of two big client investment portfolios.

The world's largest reinsurance group also wrote down a further SwFr300 million against the sliding value of its own trading book, which includes residential mortgage-backed securities and structured derivatives.

This is the most recent example of a firm taking a mark-to-market hit on its exposure to the woes of the US sub-prime mortgage market.

But it is the first time a big reinsurer has been made to pay out on a highly tailored insurance contract known as a credit default swap.

Swiss Re has been high-profile in recent weeks after joining forces with Standard Life in the UK to launch a failed bid for Resolution, the closed life funds group.

Shares in Swiss Re fell more than 7 per cent as Swiss Re revealed the surprise losses.

Shares were down SwFr6.95 at SwFr90.6.

It came just a fortnight after the Swiss group reported a 5 per cent fall in third-quarter profits after tax to SwFr1.5 billion compared with last year. At the time, the group gave no indication it was heading for a big credit-related hit.

Swiss Re said today that the two default swaps were written by its Credit Solutions unit to provide protection against a "remote risk of loss" for two of its customers.

The first swap was written last year, the other this year.

It said that the insured portfolios contained a variety of mortgage-related investments, including holdings in collateralised debt obligations (CDOs) that gave it exposure to holdings in sub-prime asset-backed securities.

A rash of downgrades by credit agencies last month forced the Swiss group to mark downs the CDOs to zero and cut the value of its sub-prime holdings to only 62 per cent of their original value, it said.

Both swap contracts were approved by the reinsurer's internal risk committees, Swiss Re said.

It added that the collapse in the market had been so sudden that a "more proactive management" of this type of deal had been necessary.

Jacques Aigrain, the chief executive, said: "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."

Swiss Re said that it would stick to its target of generating a 10 per cent rise in earnings per share and a 13 per cent increase in return on equity.

It said its after-tax losses would be SwFr981 million.

A spokeswoman for Swiss Re said that the two separately disclosed losses were not comparable.

She said that the names of the counterparties to the swaps contracts would not be disclosed.

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