Best Affirms/Downgrades Swiss Re’s Ratings; Revises Outlook

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and downgraded the issuer credit ratings (ICR) to “aa-” from “aa” of Swiss Reinsurance Company and its subsidiaries.

However, Best also announced that it has revised its outlook on the FSR to negative from stable, and the outlook for the ICRs is also negative. In addition Best has downgraded the debt ratings for all debt issued or guaranteed and has affirmed the debt rating on the Euro medium-term notes program of Swiss Re. Best also affirmed all debt ratings issued under Swiss Re Solutions Holding Corporation. The outlook is, however, negative. (See link below for a detailed listing of the companies and ratings.)

“These rating actions reflect Swiss Re’s declining capital position and weakening overall earnings,” Best explained. The negative outlook reflects Best’s “concerns that the continuing turmoil in the financial markets could further erode Swiss Re’s capital position and negatively impact earnings in 2009. The ratings also factor Swiss Re’s superior business position in the global reinsurance market.”

Best pointed out that the “continuing extreme volatility and disruptions in the capital markets have significantly impacted Swiss Re’s financial risk profile, resulting in a 24 percent drop in its shareholders’ equity since December 31, 2007, predominately driven by a CHF 5.2 billion [$4.71 billion] net unrealized capital loss and CHF 2.2 billion [$2 billion] net realized capital loss for the nine months ended September 30, 2008.

“As part of the CHF 2.2 billion net realized capital loss, Swiss Re incurred an additional loss of CHF 1.5 billion [$1.36 billion] in mark-to-market adjustments for its exposure to two structured credit default swap (CDS) transactions.”

In addition Best noted that “Swiss Re’s fixed income investment portfolio, a material part of it in the form of a variety of structured credit financial instruments, could be subject to more credit spreads volatility and potentially further mark-to-market adjustments.”

Best did say that it “acknowledges Swiss Re’s limited exposure to equity investments and its decision to increase hedging on corporate credit investments starting in July 2008 and purchase CDS protection as a proxy hedge for its structured product investment portfolio, resulting in reduction in required capital for investment risk.

“Swiss Re’s business profile as a globally diversified provider of reinsurance products has remained superior, Best’s bulletin continued, adding that the rating agency “believes that the group is well-positioned to benefit from opportunities if the non-life reinsurance cycle turns in 2009.

“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 product offering in longevity reinsurance and has underwritten several blocks of variable annuity policies.” However, Best said it “remains cautious concerning the long-term risks and rewards of these lines of business.”

Best acknowledged Swiss Re’s decision “to exit the financial guaranty reinsurance market, including its action to partially commute a specific financial guarantee contract, which reduced its public finance exposures. Swiss Re’s overall earnings significantly weakened in the first nine months of 2008 due to unprecedented investment losses and further write-downs in its CDS portfolio. As a result, net income after tax declined to CHF 884 million [$801 million], from CHF 3.99 billion [$3.61 billion] in the previous period.

“Swiss Re’s property/casualty underwriting remained profitable despite higher hurricane-related and man-made losses and deterioration of its credit insurance portfolio. Combined ratio increased to 96.4 percent in the first nine months of 2008, from 89.1 percent in the previous period.”

Best said it would “continue to monitor the long-term effectiveness of Swiss Re’s processes around its credit and financial market risk taking, the group’s ERM program and its ability to respond effectively and timely during this current period of capital markets volatility and credit markets dislocations.”

For a complete listing of Swiss Reinsurance Company’s FSRs, ICRs and debt
ratings go to: www.ambest.com/press/121905swissre.pdf.

Source: A.M. Best – www.ambest.com