Nov. 19 (Bloomberg) -- Swiss Reinsurance Co., the world's biggest reinsurer, lost 1.2 billion Swiss francs ($1.07 billion) on derivatives in October after the U.S. subprime mortgage crash roiled debt markets.

Swiss Re fell the most in more than 4 1/2 years in Zurich trading on the loss, which amounts to 981 million francs after tax. Losses occurred on two credit-default swaps Swiss Re sold to protect clients against declines in investments backed mostly by mortgages, the Zurich-based company said today.

``We clearly made some poor choices,'' Roger Ferguson, the former U.S. Federal Reserve governor who runs Swiss Re's financial-services division, told analysts on a conference call. The loss comes less than two weeks after the company, headed by Chief Executive Officer Jacques Aigrain, reported third-quarter profit that surpassed analysts' estimates.

The 144-year-old Swiss Re earns almost two-thirds of its premium income from helping shoulder property-and-casualty risks for insurers such as Allianz SE. The company's financial-services unit, which provides risk and capital management, structured investments and investment-banking services, had a 113 million- franc loss in the third quarter, it said Nov. 6.

``Since they can make tons of money in reinsurance, what were they doing with all this stuff?'' said Tim Dawson, an analyst with Helvea in Geneva who's reviewing his ``buy'' recommendation.

`Exhaustive Review'

Swiss Re shares fell 10 francs, or 10 percent, to 87.55 francs, the biggest drop since March 2003. The stock has declined 15 percent this year, compared with the 13 percent slump in the 28-member Bloomberg Europe 500 Insurance Index.

Record foreclosures on U.S. home loans to borrowers with poor credit histories rattled debt markets and caused about $50 billion of trading losses and investment writedowns at the world's biggest financial institutions.

After October investment markdowns by Citigroup Inc. and other financial companies, Swiss Re carried out ``a very detailed and exhaustive review to ensure that we don't have any further exposure, and we do not,'' Chief Financial Officer George Quinn told reporters on a conference call.

Quinn said the company is planning to integrate the financial-services unit within its other divisions by the first quarter of 2008.

The investment portfolios involved consist mostly of mortgage-backed securities, and include some subprime and asset- backed holdings in the form of collateralized debt obligations, or securities made by bundling together bonds, Swiss Re said.

Investment Downgrades

Those investments lost value in October following ``unprecedented downgrades'' by credit-rating companies amid a ``lack of any liquid market'' for the securities, Quinn said.

Swiss Re cut its estimates of the value of the CDOs to zero and the subprime securities to 62 percent of their original value, bringing the market value of the portfolio to 3.6 billion francs, the company said. Quinn said the majority of the holdings are investment grade, though further downgrades are possible.

``What is disappointing is that they've always insisted their CDS business is written with a very low likelihood of default,'' Helvea's Dawson said.

Credit-default swaps are contracts designed to protect bondholders from nonpayment. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

``I do not believe that we sold these CDS's aggressively,'' Quinn told reporters. ``The transactions were properly approved and included in our risk monitoring. What you see is the result of a very extreme market environment.''

Share Buybacks

Aigrain said in a statement that ``improvement and reinforcement of our financial risk taking process is appropriate and we have taken immediate action to make the necessary changes.''

Swiss Re plans to stick with its share buyback program and reiterated targets for earnings-per-share growth of 10 percent and return on equity of 13 percent over the course of the reinsurance pricing ``cycle.''

Munich Re, the second-largest reinsurer, ``doesn't have any news to report'' following Swiss Re's statement, spokesman Christian Lawrence said. Chief Financial Officer Joerg Schneider on Nov. 5 said ``subprime is no longer an issue at Munich Re.''

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net

Last Updated: November 19, 2007 12:02 EST