Swiss Re disappointed investors on Wednesday with a surprise loss in the second quarter, as solid earnings in insurance underwriting were overshadowed by continued losses and writedowns on its massive investment portfolio.

The SFr381m ($548m) loss for the period compared with a SFr564m profit last year and better-than-expected earnings at arch rival Munich Re, which reported second-quarter earnings this week.

Stefan Lippe, Swiss Re’s new chief executive, said the group had made “significant progress” in reducing the risk of more speculative securities built up under his predecessor Jacques Aigrain, as well as virtually winding down the two ill-judged structured credit default swap contracts that had contributed to earlier big losses.

“This powerful combination increases our confidence in delivering on our targets”, he said.

Shares in Swiss Re fell SFr1.28 or almost 3 per cent to SFr42.14 in early Zurich trading.

Swiss Re said modest rate increases left it confident it would beat its targets in its core property and casualty insurance business this year. However, the group warned that market volatility meant it remained exposed to valuation swings in some of the riskier types of financial assets still held in its investment portfolio.

The group has embarked on a “back-to-basics” strategy under Mr Lippe, appointed in February, with a significantly more cautious investment approach.

Swiss Re sought to reassure investors nursing lingering fears of a rights issue by stressing its capitalisation was now comfortably ahead of the levels needed to maintain its crucial AA credit rating.

Moreover, recent cost-cutting measures were now expected to save a net SFr150m this year, compared with the original SFr100m target.

Mark-to-market losses on hedges on corporate bonds contributed SFr1.1bn to the second-quarter loss, while Swiss Re also suffered impairment charges of SFr600m on securities products.

The group also suffered a SFr431m loss from accounting rules obliging it to recognise changes in the value of its own debt.

In the core insurance business, operating income in property and casualty improved to SFr1bn from SFr900m year on year, while the combined ratio – a key industry yardstick measuring costs and payments as a proportion of premiums – improved to 89.4 per cent from 91 per cent year on year.

Life and health suffered an operating loss of SFr10m, compared with profits of SFr535m, mainly because of mark-to-market losses on the group’s own debt,

The more cautious stance in the group’s investment policy under the “back-to-basics” strategy was reflected in a sharp fall in the return on investment to 0.5 per cent, compared with 2.9 per cent last year.

The group said it had maintained its cautious stance on corporate bonds and increased its holdings of low yielding, but safe, assets such as government bonds and cash. The portfolio of so-called “legacy assets”, which is being run down, fell significantly

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