A.M. Best Affirms Swiss Re A++ (Superior) Financial Ratings, Downgrades Debt Ratings with Negative Outlook

December 6, 2002

A.M. Best Co. has affirmed the financial strength ratings of A++ (Superior) of Swiss Reinsurance Company (Swiss Re) and its core subsidiaries with a negative outlook.

At the same time, however, the rating agency announced that it has downgraded the existing debt either “issued or guaranteed by Swiss Re,” as follows: “senior debt from ‘aaa’ to ‘aa+’ and subordinated debt from ‘aa’ to ‘aa-‘. The ratings of the company’s short term debt obligations have been affirmed at ‘AMB-1+.'”

It also noted that it has downgraded the senior debt securities assumed by Swiss Re America Holdings (originally issued by Underwriters Reinsurance Corporation) from “aa+” to “aa.” “The outlook for all ratings has been changed from stable to negative,” said Best.

The ratings “reflect A.M. Best’s expectation that the company will re-establish its superior capitalisation by year-end 2003, its strongly performing life business, the improving trend in its non-life underwriting and the company’s leading presence in the reinsurance market. Offsetting factors include weakness in the recent consolidated financial performance of the company’s non-life business and the vulnerability of its equity portfolio to asset devaluation,” said the announcement.

Best cited “weak underwriting performance and investment losses” as the main causes of the capital deterioration, and said that it expected consolidated shareholders’ equity at the end of the year to be “comparable to the half year level of CHF 18.268 billion (USD 12.274 billion).” It warned, however that “substantial further deterioration might trigger a downgrade in Swiss Re’s rating.”

The report found some significant improvements from “strong life and improving non-life performance” with life sales up 25 percent, helped by the consolidation of Lincoln National Corporation’s reinsurance business. The level of growth and performance has consistently exceeded the company’s targets, Best observed. Life operating revenues are almost double the forecast, and return on operating revenues was 11.5 percent, more than the 10 percent Swiss Re had targeted.

“In property and casualty reinsurance, A.M. Best believes that Swiss Re is well-positioned to take advantage of improved market conditions and expects this to lead to an average combined ratio of less than 105% for the period 2002 to 2004, down from 116% average for the five years to 2001,” said the bulletin.

The announcement noted that Swiss Re’s “net earned premiums in 2001 of CHF 25.219 billion (USD 15.076 billion),” assures its rank as the world’s second largest global reinsurer (slightly behind Munich Re). It’s the world’s biggest life reinsurer “with net earned premium in this sector of CHF 8.922 bllion (USD 5.334 bllion).”

“2001, Swiss Re recorded a net loss of CHF 165 million (USD 99 million),” Best noted, “and, although there was a modest recovery in the first six months of 2002, the company remains vulnerable to reductions in current investment income and both net realised and unrealised investment losses. A.M. Best expects equities to represent less than 10% of total investments at year-end 2002, down from 18% at year-end 2001.”

The report stressed that the ratings were based upon no further “substantial erosion in Swiss Re’s risk-based capital as assessed using A.M. Best’s capital model,” and a “modest profit at year-end 2002,” followed by stronger performance in 2003 and 2004.

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