Swiss Re investments sound, AXA says worst not over

ZURICH (Reuters) - Swiss Re (RUKN.VX) said on Thursday its investment portfolio remains sound despite tough financial markets, confirming its targets as additional writedowns were lower than many had expected.

But the head of France's AXA (AXAF.PA) said it was too early to say the worst of the U.S. financial crisis was over and profit at Lloyd's of London's LOL.UL insurance market dropped on falling investment income and increased cost of claim.

"It would be totally premature to say that the worst is behind us," AXA Chief Executive Henri de Castries told Europe 1 radio. "We are at the heart of something that is in the process of redefining the U.S. financial system and the financial system of the whole world."

Swiss Re, the world's second-largest reinsurer, said it had taken steps to reduce its exposure to corporate bonds, equities and the underlying quality of its reinsurance business.

It confirmed its targets of earnings per share growth of 10 percent and return on equity of 14 percent over the cycle, seeing opportunities for attractive returns from its Life & Health and Admin Re operations.

"The company is doing the right thing because it said it will reduce exposure to corporate bonds and structured assets," said analyst Rene Locher at Sal. Oppenheim.

Swiss Re shares rose 1.8 percent to 63.65 francs by 4:00 a.m. EDT, compared to a 1.6 percent gain in the European insurance index .SXIP. AXA shares were up 2.9 percent at 23.17 euros.

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The reinsurer had a mark-to-market loss of 245 million Swiss francs ($225 million) in structured credit default swaps (CDS) in the third quarter and estimated a further 32 million loss from the end of August to Sept 19.

These bring total writedowns in Swiss Re's financial services unit, which creates products to transfer risk to capital markets, to nearly 3 billion francs.

"Structured CDS is the weak spot and we may see more of these (writedowns), but this is as the market expected," Oppenheim's Locher said when asked if the extra writedowns were a surprise.

Swiss Re also said it had hedged sub-prime exposures within its trading portfolio and gross notional exposure was now 3.2 billion francs.

Lloyd's of London said on Thursday that first-half profit at its insurance market, the world's oldest and biggest, fell 47 percent to 949 million pounds ($1.76 billion).

But tough markets also offer opportunities, both Swiss Re and AXA said.

"Today's situation will provide us within a few months with opportunities to strengthen our positions," AXA's de Castries added.

(Additional reporting by Dominique Vidalon in Pairs and Lorraine Turner in London; Writing by Sam Cage; Editing by Greg Mahlich and Hans Peters)