Moody’s Lowers Swiss Re’s Ratings

Moody’s Investors Service announced that it had downgraded the insurance financial strength rating and long-term debt ratings of Swiss Reinsurance Company and its various guaranteed and non-guaranteed subsidiaries by one notch.

The rating agency lowered its insurance financial strength rating to Aa2, senior debt rating to Aa2, subordinated debt rating to A1 on Swiss Re, the primary company. However it affirmed Swiss Re’s short-term rating of Prime-1, and assigned all the ratings a stable outlook.

Commenting on the rating changes, Moody’s said that the rating action for Swiss Re “reflects Moody’s views about the balance of risk and reward for reinsurers generally, which strongly influences Moody’s expectations about the company’s prospective operating profitability, both in terms of amount and volatility. Moody’s also noted Swiss Re’s ability to organically re-generate capital more appropriately positions it at the Aa2 level, within the peer group of large global financial institutions.”

The announcement noted that “the rating level also takes into account Swiss Re’s numerous strengths. With its very strong business diversification, both geographically and by line of business, Swiss Re has an outstanding franchise and is excellently positioned to benefit from a ‘flight to quality’ in the global reinsurance industry from its leading position as the largest life reinsurer and second largest non-life reinsurer.”

Moody’s also commented on Swiss Re’s reduced risk profile since 2001, which it indicated is “complemented by proactive risk management and cutting-edge use of capital market instruments to manage peak exposures. Additional strengths include excellent liquidity and a well established track record of conservative reserving despite recent adverse reserve development on U.S. liabilities.”

The announcement noted that ” Moody’s believes that the various measures taken throughout Swiss Re to improve its operating efficiency should continue to yield positive results in the coming years. In addition, Moody’s noted Swiss Re’s successful track record of managing the integration risk in its acquisitions, most importantly through the Admin Re business.”

It indicated, however, that “offsetting these strengths are several challenges facing Swiss Re.” The resurgence of the insurance cycle is Moody’s principle concern. It noted that “as the non-life reinsurance cycle reaches a cyclical peak, the company will need to maintain pricing discipline in order to sustain positive underwriting results in the non-life segment as well as to offset the impact of lower investment yields.”

It also said that Swiss Re will “be challenged to further improve the quality and sustainability of earnings– as measured by reduced volatility and driven primarily from core operations– and to enhance its return on capital while maintaining a leverage profile appropriate for the ‘Aa’ rating category. In addition, Swiss Re must continue to manage closely its evolving risk profile, in particular with regard to its growing life reinsurance and financial intermediation businesses.”

Lastly, the rating agency noted the potential for further adverse reserve development, especially for the underwriting years 1997-2001, in line with others in the non-life reinsurance industry.

Moody’s indicated that the stable outlook was based on the following expectations: “1. Further improvements in 2004 of after-tax earnings from core operations, which Moody’s anticipates will be in excess of CHF 2 billion [$1.57 billion] and characterized by stability and consistency, subject to unexpected large loss events. 2. Fixed charge coverage multiple in the mid-teens range. 3. Further lowering of financial leverage (e.g. adjusted debt to adjusted equity) towards the mid-teens percentage range. 4. Continued strategic emphasis on the group’s global non-life and life reinsurance businesses, where Swiss Re has a significant market presence and competitive advantage.”

Commenting on the prospect for future rating changes over the medium term, Moody’s said that, “a material deviation from the expectations outlined above would likely cause a reassessment of the rating downward. On the other hand, Moody’s said that achievement of the following conditions would likely lead to a positive reassessment of the rating: capitalization returned to historic levels of strength; core financial leverage below 10 percent; and sustainable returns on equity in excess of 13 percent over the underwriting cycle.”