Best Removes Swiss Re Ratings from Review; but Outlook is Negative

A.M. Best Co. has removed from under review with negative implications the financial strength rating of ‘A+’ (Superior) and the issuer credit ratings (ICR) of “aa” of Swiss Reinsurance Company and its similarly rated subsidiaries. Best also affirmed the ratings; however it said, “the outlook assigned to the ICRs is negative, while the outlook assigned to the FSR is stable.”

In a related action Best removed from under review with negative implications all debt issued or guaranteed by Swiss Re and assigned a negative outlook. (go to: www.ambest.com/press/032004swissre.pdf . for a complete list of the ratings affected.

Best noted that it placed the ratings under review “due to uncertainties relating to Swiss Re’ s announcement on November 19, 2007 of a CHF 1.2 billion ($1.1 billion) mark-to-market loss, or CHF 981 million ($890 million) after tax, arising from its exposure to two credit default swaps written by its Credit Solutions unit.”

The loss resulted from the unprecedented ratings downgrades in October 2007 and the lack of liquid markets for the underlying securities. Best indicated that it required additional time and efforts “to further evaluate Swiss Re’ s enterprise risk management (ERM) and identify and evaluate the steps Swiss Re has taken to minimize such financial risks in the future.”

Best acknowledged that Swiss Re has “executed a thorough review of other credit default swap transactions, as well as its investment and trading portfolios, and has concluded that it has no similar exposures.” It has also has strengthened the processes around its credit and financial market risk taking including the integration of Credit Solutions into a matrix organization and a clear segregation of business origination from underwriting and portfolio steering.

Best explained the negative outlook on the ICR as reflecting its “concerns over the long-term effectiveness of these processes and the efficacy of Swiss Re’ s newly established commitment committee that oversees all financial services products.” The rating agency said it will be monitoring the ERM program and would “assess its ability to respond effectively and timely during the current period of turmoil in the mortgage-related security industry, as well as the current downturn in the non-life underwriting cycle and any plans to expand into longevity reinsurance. Any material breakdown in its ERM program could result in downward pressure on its ratings.”

Best added that Swiss Re’s FSR and ICR and those of its rated subsidiaries “are unchanged following the company’ s announcement that it entered into a proportional reinsurance contract with Berkshire Hathaway Inc. effective January 1, 2008, and its subsequent intention to acquire its own shares in the market for general treasury purposes up to a total value of CHF 1.75 billion ($1.6 billion). Swiss Re now targets a total buy-back, including shares already re-purchased, of up to CHF 7.75 billion ($7.0 billion). “This buy-back is expected to be completed over the next 24 months as the capital relief resulting from the quota share arrangement is achieved. Under this quota share arrangement, Berkshire Hathaway will assume a 20 percent share of all Swiss Re’s property and casualty business for the next five years,” Best concluded.

Source: A.M. Best