Best Affirms Swiss Re and Subs ‘A’ Ratings; Outlook Stable

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of Swiss Reinsurance Company Ltd. and its subsidiaries. Best also affirmed all debt ratings issued by Swiss Re and its subsidiaries. The outlook for all of the ratings is stable.

“The ratings reflect Swiss Re’s strong risk-adjusted capitalization, very strong core operating results and resilient business profile as a globally diversified provider of reinsurance products,” said Best.

However, Best also noted that “the exposure of Swiss Re’s overall risk-adjusted capitalization to the potential negative effects of the continuing uncertainty in the financial markets, the quality of its capital and the potential impact of soft market conditions on opportunities in the property/casualty global reinsurance market,” should be considered as offsetting factors.

Best said the the rating outlook “reflects Swiss Re’s actions to reduce its risk profile and very strong fundamental underwriting profitability.”

In Best’s analysis “Swiss Re’s capitalization takes into account the convertible perpetual capital instrument (CPCI) and the capital relief derived from a loss reserve adverse development reinsurance cover and a 20 percent quota share reinsurance contract covering property/casualty business, all provided by Berkshire Hathaway Inc.”

Best added that despite Berkshire Hathaway’s very strong credit profile, it believes that Swiss Re’s quality of capital is “somewhat affected by its exposure to counterparty risk concentration given the magnitude of transactions with a single counterparty in Berkshire Hathaway. However, between December 31, 2008 and September 30, 2009, including the CPCI from Berkshire Hathaway, Swiss Re reported a 28 percent increase in shareholders’ equity, largely due to sound underwriting results in both property/casualty and life/health operations and the improved market value of invested assets.”

In addition Best pointed out that “Swiss Re’s investment portfolio and legacy financial risks arising from securitized products could be subject to more credit spread volatility and potentially further mark-to-market adjustments given the current economic climate. As of September 30, 2009, 13 percent of the overall investment portfolio was in the form of structured credit financial instruments, of which 26 percent were agency securities largely of high credit quality.

“These rating concerns are partially offset by Swiss Re’s continued execution of asset de-risking initiatives. These actions include portfolio simplification, more focused asset liability management and extensive hedging strategies in its asset management unit, as well as active management of underlying assets in structured credit default swaps (SCDS) and total return swaps (TRS), and acceleration of run offs and commutations in the group’s legacy portfolio. In 2009, Swiss Re made substantial progress in de-risking its run off of its Financial Guarantee Re book by significantly reducing its national exposure to this business.”

Best described Swiss Re’s business profile “as a globally diversified provider of reinsurance products,” adding that it has “remained resilient throughout the recent economic crisis, despite the adverse impact on its performance from legacy financial risks.” Best said it “elieves that the group remains well-positioned to benefit from opportunities should the non-life reinsurance cycle turn. The group’s acquisition of Barclays Life Assurance Company Ltd (announced in August 2008) provides further scale and infrastructure for Swiss Re’s Admin Re® business. Since 2006, Swiss Re has expanded its product offering in longevity reinsurance and has underwritten several blocks of life reinsurance business. However, A.M. Best remains cautious concerning the long-term risks and rewards of these lines of business.”

Swiss Re’s overall earnings are expected to improve strongly in 2009 largely due to improved loss experience and recoveries within the equity and credit markets. In 2008, the group’s earnings significantly weakened due to unprecedented investment losses and further write-downs in its SCDS portfolio. As a result, the net loss after applicable income tax benefit was CHF 864 million, compared to a net income after-tax of CHF 4.2 billion in the previous year. Swiss Re’s nine-month 2009 property/casualty combined ratio was solid at 88.2 percent and benefited from nominal catastrophe losses and favorable loss reserve development. The combined ratio of 97.9 percent in 2008 was impacted by Hurricane Ike. Life/health underwriting results remained strong, despite lower fee income in Admin Re® and benefit reserve increases for variable annuity policies as the nine-month 2009 benefit ratio (calculated as claims divided by premiums earned, both of which exclude unit-linked and with profit business) of 81.9 percent improved, compared with 85.5 percent for full-year 2008.”

Best indicated that it would “continue to assess the sustainability of the group’s improved operating performance and capitalization, specifically as it relates to the potential repurchase of the CHF 3 billion [$2.86 billion] CPCI prior to March 2012, which constitutes the date from which Berkshire Hathaway has the right to convert the CPCI to common shares.

“The long-term effectiveness of Swiss Re’s enterprise risk management program and its ability to respond effectively during this current period of capital market volatility and credit market dislocations also will be monitored.” Best believes that the group’s enhanced enterprise risk management focus can only be proven over time, but believes that management has developed a comprehensive framework to execute its strategies.

For a complete listing of Swiss Reinsurance Company Ltd and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/121402swissre.pdf.

Source: A.M. Best – www.ambest.com