Rating Agencies React to Swiss Re/GE Deal; On Review Status

Standard & Poor’s Ratings Services, A.M. Best Co. and Fitch Ratings have all taken action following the announcement on Friday that Swiss Re would acquire the bulk of GE Insurance Solutions for $6.8 billion (See IJ Website, Nov. 18).

S&P placed its “AA” long-term counterparty credit and insurer financial strength ratings on Swiss Re and its core operating companies on CreditWatch with negative implications along with its debt ratings. Best also placed the financial strength rating (FSR) of “A+” (Superior) and the issuer credit rating (ICR) of “aa” on Swiss Re and its rated subsidiaries under review with negative implications. Accordingly, Best put all of the debt ratings either issued or guaranteed by Swiss Re under review with negative implications as well. Fitch took similar action (see related article in National section).

GE on the other hand seems to have basically gotten thumbs up from the rating agencies following its long anticipated decision to exit the P/C insurance business. Best placed the rated subsidiaries of the Overland Park, Kansas operation under review with developing implications, including Employers Reinsurance Corporation and GE Reinsurance Corporation (together known as Employers Re Corp Group), Westport Insurance Corporation and Coregis Insurance Company.

“The developing implications are subject to further due diligence over the next few weeks as details of the transaction are finalized,” said Best. “The due diligence will focus on the allocation of up to $3.4 billion of reserve charge including its impact on the capital maintenance agreements provided to Employers Re Corp Group by General Electric Capital Corporation.”

S&P placed its “BBB+” counterparty credit rating on GE Insurance Solutions Corp. (GEIS) on CreditWatch with positive implications. It also placed its “A” counterparty credit and financial strength ratings on Employers Reinsurance Corp. (ERC) and affiliates on CreditWatch positive.

S&P’s ratings on GEIS factor in GE’s “AAA” rating. Credit analyst Simon Marshall therefore explained that the “CreditWatch status reflects the execution risk associated with integrating a group of the size and complexity of GEIS, which has a lower rating than that on Swiss Re. The ratings on GEIS partly reflect the state of flux that it has been in for a number of years caused by uncertainty over the long-term ownership of the group,” he added.

On the positive side S&P noted: “These risks are partly offset by Swiss Re’s track record of successful transatlantic acquisitions and the advanced integration planning already in place. The transaction is planned to complete mid-2006, at which point the CreditWatch placement would be resolved. If the transaction is completed as currently constituted, we expect that the ratings on Swiss Re and its core operating companies would be lowered to ‘AA-‘ with a stable outlook. If the transaction does not proceed, the ratings on Swiss Re would be affirmed.”

Best also has placed the ratings of the main operating entities of the GE Frankona Group under review with developing implications, as they benefit from a guarantee provided by Employers Re.

Best indicated that its future analysis of Swiss Re “will also focus on the future structure of the combined group as well as the relatively high execution risk inherent when merging an operation of this size and complexity.” The rating agency said it “will discuss these issues with Swiss Re’s management and aims to resolve the under review status as soon as possible.”