MOODY'S DOWNGRADES LONG-TERM RATINGS OF SWISS RE BY ONE NOTCH; INSURANCE FINANCIAL STRENGTH RATING TO Aa1; UNDERWRITERS RE GROUP, INC'S SENIOR DEBT LOWERED TO Aa3; ALL RATINGS HAVE A STABLE OUTLOOK
Prime-1 short-term ratings confirmed
London, 08 November 2002 -- Moody's Investors Service announced today that it had downgraded by one
notch the insurance financial strength rating and long-term debt
ratings of Swiss Reinsurance Company and its guaranteed subsidiaries.
The new ratings are: insurance financial strength rating at Aa1
and subordinated debt at Aa3. In addition, the insurance
financial strength rating of SR International Business Insurance Co.
Ltd was lowered from Aa1 to Aa2. Lastly, the senior debt
rating of Underwriters Re Group, Inc. was downgraded by two
notches from Aa1 to Aa3. Swiss Re's short-term of Prime-1
was confirmed. The rating outlook for all ratings is stable.
The rating changes and confirmations conclude the review for possible
downgrade initiated in September 2002.
Commenting on the rating changes, Moody's said its review focused
on the prospects for Swiss Re's earnings, capital and level of financial
leverage being restored to their former exceptional level. The
rating agency examined these issues in light of recent external market-related
developments, underwriting losses sustained as a result of the 11
September 2001 attacks, the muted outlook for investment returns,
as well as Swiss Re's more active capital management in recent years.
Based on its review, Moody's has concluded that while Swiss Re's
internal capital generation is likely to be strong, it may not be
sufficient to restore the company's equity base to historical levels.
Thus, in Moody's opinion, whereas Swiss Re maintains an excellent
franchise, its current capital and earnings are not commensurate
with issuers in the Aaa insurance financial strength category.
Elaborating on the downgrade, Moody's noted that Swiss Re's earnings
in 2001 and the first half of 2001 have been affected negatively by large
losses such as September 11th and the decline in capital markets.
The company reported a loss of CHF 165 mn for the year 2001 and a profit
of CHF 118mn for the first half of 2002. Furthermore, the
rating agency expects Swiss Re's earnings to be subdued for the remainder
of 2002 due to the decline in equity markets since June 30, 2002.
Moody's notes that core insurance profits have been sound in the life
& health unit but below average in the P&C unit. On a positive
note, Moody's anticipates the underwriting results in the P&C
unit will show a strong improving trend as the book continues repricing
Moody's added that in its opinion, Swiss Re's level of financial
leverage has risen and is likely to stay above historical averages for
the medium term. Moody's noted that Swiss Re's reported shareholders'
equity declined to CHF 18.3 billion as of June 30, 2002 from
CHF 22.6 bn as of year-end 2001 due to unrealised investment
losses of CHF 2.4 bn and negative currency effects of CHF 1.3
bn. Nevertheless, Moody's does not expect the absolute level
of financial debt to rise meaningfully. Moody's commented,
however, that Swiss Re's level of fixed charge coverage has been
low over the last two years but is expected to improve during 2003,
barring unexpected large catastrophic losses or asset impairment charges.
Lastly, while Moody's believes Swiss Re maintains robust reserves,
the rating agency does not rule out adverse claim reserve development
in line with others in the industry.
Commenting on Swiss Re's non-insurance operations, Moody's
said that these businesses -which Moody's believes may provide
some benefit of diversification to the parent, are not a fundamental
source of support for Swiss Re's rating. Moody's noted that the
contribution of the Financial Services Business Group (FSBG) has performed
below expectations since FY2000. Earnings for 1H02 were undermined
by a loss of CHF 379 mn which, in turn, resulted from claims
in its credit reinsurance business, as well as losses in its risk
solutions unit and a claim on its Lloyd's Central Fund cover. The
rating agency added that it expected that FSBG's growth trend would remain
commensurate with that of the remainder of the organisation so as not
to strain the parent's and its subsidiaries' capital resources.
Moody's said that sustained improvement in the core underwriting results
of the P&C operations, the quality of the integration of the
Lincoln Re acquisition, the overall quantity and quality of earnings
stability, and a progressive lowering in financial leverage are
among the factors that could move the rating up over the medium term.
Conversely, continued weak earnings and fixed charge coverage coupled
with higher leverage could place pressure on the ratings.
Moody's said that in its opinion, Swiss Re is excellently positioned
to take advantage of the current tight capacity in the industry.
Swiss Re is one of the most diversified of the global reinsurers.
Following the December 2001 acquisition of Lincoln Re, the life
reinsurance sector now accounts for approximately 40% of consolidated
premiums. The Lincoln acquisition also improved the geographic
balance of Swiss Re Group with approximately 42% coming from North
America, 44% from Western Europe and the remaining 14%
from the rest of the world. Moody's added that the Admin Re business
is expected to provide significant portfolio growth to the life reinsurance
business. (Admin Re is the acceptance of closed blocks of in-force
life and health insurance business either through acquisition or reinsurance,
typically assuming the responsibility to administer the underlying policies.
Admin Re can also extend to the acquisition of an entire life insurance
Moody's expects the life reinsurance segment to continue to provide high
quality and stable earnings, counter-balancing the more volatile
With regard to the latter, Swiss Re expects better cycle management
and the shift to non-proportional business should improve the quality,
risk profile, and the returns of the book. Moody's commented
that Swiss Re's WTC provisions appear robust at CHF 3 billion (net) with
payment on claims approximately 20% thus far. Moody's further
noted that asset risk has been reduced over the course of 2002,
with meaningful reductions in the credit derivative portfolio and through
the use of hedges to minimise the impact of volatile equity markets.
Moody's added that the actual losses from the credit derivatives portfolio
has been relatively modest ($13mn for period January 1, 2001
through June 30, 2002.) Nevertheless, results were
impacted by CHF 55m of unrealised losses due to the mark-to-market
valuation of this book. Lastly, Moody's expects that any
management changes due to Mr. Kielholz's imminent accession to
Chairman of the Board of the Credit Suisse Group will be addressed in
the near future.
Swiss Re's ratings are supported by its excellent franchise and leading
position in the highly specialised global reinsurance market, as
the largest life reinsurer and second largest non-life reinsurer,
its sound financial fundamentals, and historic track record of profitability.
Core to its financial strength has been its reserving philosophy and prudent
capital management, although the latter has become more aggressive
in recent years.
In reference to the downgrade of the senior notes issued by Underwriters
Re Group, Inc, Moody's said that Swiss Re America Holding
Corporation (SRAH) assumed this debt effective March 29, 2001.
SRAH is the parent of Swiss Reinsurance America Corporation, and
is, in turn, owned by Swiss Reinsurance Company. Moody's
noted that the rating reflects the strength of the operating subsidiaries
that are owned by SRAH, as well as the implicit support of Swiss
Re. There are, however, no explicit forms of supports
between Swiss Re (the ultimate parent) and the obligations of SRAH.
Swiss Re, based in Switzerland, is the second largest global
reinsurer, with revenues of approximately CHF16.7bn through
the first six months of 2002 and consolidated shareholders' equity at
mid-year 2002 of CHF 18.3bn.
The following ratings were downgraded:
Swiss Reinsurance Company and guaranteed subsidiaries-insurance
financial strength rating to Aa1,
SR International Business Insurance Co. Ltd- insurance financial
strength rating to Aa2,
Swiss Reinsurance Company and guaranteed subsidiaries- subordinated
debt rating to Aa3,
Underwriters Re Group, Inc- senior debt rating to Aa3.
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454