Ratings Recap – Notes, Pref. Shares: Swiss Re, Fairfax, AXIS, Munich Re

March 22, 2012

A.M. Best Co. has assigned a debt rating of “a+” to the recently issued CHF 320 million [$350 million] 7.25 percent perpetual subordinated notes with a stock settlement issued by Swiss Reinsurance Company Ltd., and has assigned a stable outlook. Best said the “notes have no final maturity date, and Swiss Re may redeem the notes for stock in whole, but not in part, together with any accrued or unpaid interest on September 1, 2017. Thereafter Swiss Re may redeem the notes at each interest payment date or due to certain events as listed in the prospectus. As a result of this debt issuance, Swiss Re’s unadjusted financial leverage is projected to be in the high teens and will remain fully supportive of its current rating level. Fixed charge coverage also is expected to remain strong and in line with the company’s historical earnings performance. Swiss Re intends to utilize the proceeds for general corporate purposes. The debt rating reflects Swiss Re’s leading global profile in the reinsurance market, strong risk-adjusted capitalization and robust risk management program. Somewhat offsetting these strengths are Swiss Re’s exposure to catastrophic losses, which diminishes operating results in particular years.”

A.M. Best Co. has assigned a debt rating of “bb+” to the forthcoming up to C$250 million [US$251.2 million] five-year rate reset cumulative convertible preferred shares, Series K (Series K preferred shares) of Fairfax Financial Holdings Ltd. , and has assigned a stable outlook to the issue. Best noted that “all remaining ratings of Fairfax are unchanged. The Series K preferred shares will be issued in Canada under a prospectus supplement to Fairfax’s short form base shelf prospectus dated December 10, 2010. The annual dividend rate will be set every five years and will be equal to the five-year Government of Canada bond rate in effect 30 days prior to the anniversary date of the initial issuance, plus 3.51 percent. The rate for the initial five-year period will be 5.00 percent. The proceeds will be used to retire outstanding debt, augment Fairfax’s cash position and increase short-term investments and marketable securities held at the holding company and for general corporate purposes. Beginning with the first five-year anniversary of the issuance, holders of the Series K preferred shares will have the right to convert any or all of their Series K preferred shares into an equal number of cumulative floating rate preferred shares, Series L (Series L preferred shares). The interest rate on the Series L preferred shares will set quarterly based on the then current 90-day Canadian Treasury Bill, plus 3.51 percent. At year-end 2011, Fairfax’s unadjusted debt-to-total capital ratio was calculated at 38.6 percent, when given partial equity credit for the preferred shares, the measure is 32.2 percent.” Best also indicated that based on the gross proceeds of C$250 million, “Fairfax’s unadjusted debt-to-total capital ratio is less than 2 percent higher following the issuance of these preferred securities. These calculations include the debt of wholly owned subsidiaries, which are capable of servicing their own debt. The financial leverage and coverage ratios remain within Best’s guidelines for Fairfax’s current ratings and are expected to remain so over the near term.”

A.M. Best Co. has assigned a debt rating of “bbb-” to the $400 million 6.875 percent Series C preferred shares of Bermuda-based AXIS Capital Holdings Limited, and has assigned the issue a positive outlook. “The proceeds from the issuance will be used by AXIS to repurchase its Series B preferred securities that are tendered and a portion of its Series A preferred securities,” Best explained. “The actions taken by AXIS regarding its preferred securities do not have a significant impact on the organization’s overall capital structure as it relates to the company’s ratings. Best added that it “remains comfortable with all aforementioned ratings.”

Fitch Ratings has assigned Munich Re’s (‘AA-‘ /Stable) proposed issue of hybrid securities an expected rating of ‘A(exp)’, which the rating agency said was in line with its “standard notching practices. The final rating is contingent on the receipt of final documents conforming to information already received.” Fitch explained that the “issue is part of Munich Re’s active capital management and takes into account the refinancing of the company’s current outstanding bonds. Munich Re has recently announced a tender for the outstanding €1.7 billion [$2.2377 billion] hybrid bond at 6.750 percent coupon, callable 21 June 2013 with a maturity date of 21 June 2023. The issue is expected to temporarily slightly increase Munich Re’s financial leverage. Munich Re’s financial leverage ratios are expected to remain within a range that is compatible with the group’s rating level.” Fitch also indicated that the “proposed issue will first be callable in 2022 with a final maturity date in 2042. The securities will pay a fixed annual coupon for 10 years until the initial call date. Unless the bonds are called at that time, the interest rate will convert into a floating rate, payable quarterly and based on three-month Euribor plus a margin including a 100 basis points step-up. The notes are subordinated to senior creditors and are deferrable at the option of the issuer, subject to a ‘dividend pusher’ clause with a look-back period of six months. The hybrid has been prepared for Tier 2 own funds eligibility according to the Solvency II regime as currently proposed. According to Fitch’s methodology, this hybrid will classify as 100 percent capital within Fitch’s risk-based capital model and will classify as 100 percent debt regarding Fitch’s financial leverage calculations.”

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