MOODY'S CHANGES RATING OUTLOOK OF SWISS RE AND ITS SUBSIDIARIES TO NEGATIVE FROM STABLE; ALL RATINGS CONFIRMED
London, June 28, 2000 -- Moody's has changed its rating outlook on Swiss Reinsurance Company (Swiss Re) and its subsidiaries to negative from stable. Moody's also confirmed the Aaa insurance financial strength ratings of Swiss Re, Bavarian Re, Swiss Re America, Swiss Re UK, the Aa1 insurance financial strength rating of SR International, and all debt ratings. The Prime-1 rating on short-term debt issued by Swiss Re Financial Products Corporation is confirmed and its outlook is stable.
Moody's stated that the decision to change the rating outlook is as much a reflection of company-specific factors as of powerful market forces affecting all industry participants. A change in rating outlook is a complementary opinion of the direction that the rating could take over the next twelve to eighteen months as a result of trends or developments already taking place.
The change in outlook reflects mounting evidence that market and shareholder pressures are driving Swiss Re to take a comparatively aggressive stance in capital management, acquisitions and business development. These developments represent an incremental shift in the company's overall credit profile. Inevitably, changes at the top end of the rating scale are subtler than in the middle or at the bottom end.
Moody's still views Swiss Re as one of the strongest reinsurers in the world. The breadth and depth of the organisation's intellectual and financial resources is only comparable to that of a handful of peers. Further, Moody's expects Swiss Re will continue to be a superior performer, to continue to benefit from consolidation, to be instrumental and a key player in the world of risk identification, management and financing, and expects that its financial strength will continue to surpass that of most of its peers.
Nevertheless, the medium-term deterioration in operating results, as evidenced for instance by the slide in the core operating margin, reveals a more aggressive approach to underwriting than had historically been the case. In an effort to maintain or increase market share, underwriting discipline has been allowed to deteriorate. A rise in operating costs until 1998, a gradual fall on interest rates and a higher frequency of catastrophe losses have further accentuated a negative trend. Further, Swiss Re's life and health reinsurance business has grown to represent close to one-third of the business. While this development could enhance future returns, it is not yet clear that it will manage to offset the deterioration on the property and casualty reinsurance book.
Furthermore, Swiss Re's more aggressive management of the capital base has also been a concern for several years. While it is understandable that shareholders should receive a return commensurate with the risk they assume, Moody's believes that the pursuit by Swiss Re of its goal - 1000 basis points above the risk-free rate of return -- in the current and foreseeable environment could weaken its financial condition. The core business is not contributing much to the group's returns and an attempt to deliver high returns will lead to capital erosion, in the form of an unsustainable level of investment gains, special dividends, and increased financial and operating leverage. Much of this already has been taking place.
Finally, regarding the company-specific considerations that led to the change in the rating outlook, Swiss Re is the ultimate parent company of the Swiss Re Group and its financial strength has been a key support in the rating of all its subsidiaries. Conversely, a change in outlook at the parent company is also linked to the performance of the subsidiaries, from which Swiss Re derives much of its strength, and reflects the potentially lower level of support that subsidiaries could receive from the parent.
Moody's has maintained a negative outlook on the reinsurance industry for several years. Whilst soft markets, low growth rates in property and casualty insurance, and adverse trends have not precluded the existence of a few companies with the highest ratings, industry consolidation, convergence, fierce competition and a greater emphasis on maximisation of share value are gradually changing this situation. The trends are amply discussed in Moody's Global Reinsurance Industry Outlook but their overall effect is to put pressure on revenue flows and margins, and to weaken and destabilise franchises.
Elaborating on the industry-wide factors, Moody's stated that in recent years it had witnessed what could be the beginning of a trend opposed to the polarisation seen within the reinsurance industry and within other sectors of the financial services industry. Whereas the expectation that the strong companies would become stronger and the weak would become weaker has been true for some time, other forces are offsetting the power of that trend. For instance, the rating agency added, consolidation in the insurance brokerage industry and technological developments give global reach to relatively small players, and efficient capital markets and a more widespread understanding of risks and how to manage, finance and underwrite them, have enabled comparatively small and even new operations to compete against the largest companies. This is weakening long and stable relationships of direct writers. Moody's does not expect the industry to become homogeneous but at the extremes there has been an equalising trend: the weaker have been empowered while the stronger have been weakened.
Growth prospects are not promising in the property and casualty insurance markets of the largest industrialised countries, including in particular those of the United States, Japan, Germany and the United Kingdom, all of which are important to Swiss Re. As for developments in life, health and financial reinsurance, where the growth outlook is more positive, Moody's views the role of the reinsurer as relying largely on tax and regulatory arbitrage, which is not company-specific but is available to many and can be lost over time as changes take place that will level the playing field. Although the risks are in some cases smaller, the margins in these lines of business are slim. For this reason, Moody's believes that reinsurers generally will not be able to obtain the same margins in the future than they were able to achieve in the past.
The rating outlook has been changed to negative from stable at the following companies:
Swiss Reinsurance Company - Aaa insurance financial strength rating
European Reinsurance Company of Zurich --- Aaa insurance financial strength rating
Bavarian Reinsurance Company -- Aaa insurance financial strength rating
Swiss Reinsurance America Corporation --- Aaa insurance financial strength rating
Swiss Reinsurance Company UK Limited --- Aaa insurance financial strength rating
SR International Business Insurance Company Ltd. - Aa1 insurance financial strength rating
The rating outlook on debt issued by the following subsidiaries is also changed to negative:
Swiss Reinsurance Company - Aa1 subordinated debt
Swiss Re Finance (Bermuda) Ltd. - Aaa senior unsecured debt
The Prime-1 rating on short-term debt issued by Swiss Re Financial Products Corporation is confirmed. Its outlook is stable.
Swiss Reinsurance Company is the second largest reinsurer in the world, writing premiums of approximately Sfr 21bn and with consolidated shareholders' equity at year-end 1999 of Sfr 19bn. Swiss Re is based in Zurich, Switzerland.
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