Best Lowers Swiss Re Ratings to ‘A+’

October 20, 2003

A.M. Best Co. announced that it has downgraded the financial strength ratings to A+ (Superior) from A++ (Superior) of Swiss Re and its core subsidiaries. It also said that it had accordingly downgraded the ratings on all debt instruments issued by Swiss Re’s group entities, and affirmed Swiss Re’s commercial paper program at AMB-1+. “The outlook on all ratings has been changed to stable from negative,” said Best.

“These rating actions reflect A.M. Best’s view that Swiss Re’s prospective consolidated earnings are unlikely to be supportive of an A++ consolidated risk-based capital level throughout the cycle, especially after the reduction suffered from historic levels,” said the announcement. “Current capital could be viewed as being at an A++ level; however, the degree of ‘soft’ capital mitigates this in part. This fact, combined with the earnings outlook for Swiss Re and the industry, leads A.M. Best to conclude that capital levels that are more consistent with an A+ financial strength rating will be maintained prospectively.”

Best said it had also taken into account “Swiss Re’s superior business position in the worldwide reinsurance markets as well as the very stable and experienced management team.”

The bulletin noted that first half results for 2003 show that Swiss Re “generated an after-tax profit of CHF 691 million (USD 510 million), influenced by a strong performance of the life and health portfolio business (8.10% return on operating revenues).” The rating agency said it “believes that the positive underwriting results reported in the property/casualty sector largely reflect the globally highly attractive pricing environment.” In its opinion “the improvement in Swiss Re’s property/casualty underwriting performance with a combined ratio of 99.8%–from 104% at year-end 2002–reflects a relatively slow turnaround given the current market conditions.”

Best highlighted the state of Swiss Re’s capital levels. It said that “despite the improvement in the first six months of 2003,” it “believes that the current degree of consolidated earnings is unlikely to enable Swiss Re to maintain an A++ capital level throughout the underwriting cycle, particularly after reduction on historic risk-adjusted consolidated levels.”

The bulletin added that, “although the existing risk-based capital base could be viewed as being at an A++ level, the degree of reliance on ‘lower quality’ or ‘soft’ capital (i.e., deferred acquisition costs, present value of future profits and hybrid debt) in part mitigates this. A.M. Best’s view of Swiss Re’s risk-adjusted capitalisation also reflects the historical stability of its claims reserves.”

Best did note that “As the largest life and the second-largest non-life reinsurer, Swiss Re benefits from a superior brand and outstanding underwriting capabilities worldwide.” It also believes that insurance buyers will focus on this financial strength, and that this “is likely to further enhance Swiss Re’s business position.”

It also cited Swiss Re’s recent history of growth, noting that “gross written premiums grew by 14.8% to CHF 32.7 billion (USD 24.2 billion) in 2002 (split 62% non-life, 38% life/health in 2002),” and that the company had “managed to achieve further premium increases at the January and April 2003 renewals. Overall net premiums earned in the first six months of 2003 grew by 4%, including the effects of exchange rate movements (at constant exchange rates +19%), and A.M. Best expects a similar growth for the full year 2003.”

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