The credit crisis finally drew blood in the insurance sector yesterday after months of speculation about mounting industry losses.

Swiss Re, the world’s largest reinsurer, revealed a SwFr1.2 billion (£523.5 million) pretax loss after it was forced to pay out on protection that it had written to cover falls in two big client investment portfolios.

The Swiss group also wrote down SwFr300 million against the sliding value of its own trading book, which includes residential mortgage-backed securities and structured derivatives.

Yesterday’s surprise disclosure wiped more than 10 per cent off the value of Swiss Re shares, which tumbled SwFr10 to SwFr87.55, despite firm assurances the group would meet its financial targets.

The loss, SwFr981 million after tax, was 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 was the first time that a big reinsurer had paid out on highly tailored insurance contracts known as credit default swaps.

The losses came only a fortnight after Swiss Re reported a 5 per cent fall in third-quarter after-tax profits 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.

The two default swaps were written by Swiss Re’s 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.

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

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