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Rating Action:

Moody's Affirms Swiss Re's Ratings (Aa2 Senior) - Outlook Revised to Negative

05 Nov 2008
Moody's Affirms Swiss Re's Ratings (Aa2 Senior) - Outlook Revised to Negative

London, 05 November 2008 -- Moody's Investors Service has affirmed the insurance financial strength and debt ratings of Swiss Reinsurance Company (Swiss Re) and associated companies (IFSR at Aa2 and see debt list below), and revised the outlook to negative from stable. Short-term ratings of Prime-1 were also affirmed. These affirmations follow the recent Q3 2008 earnings announcement by Swiss Re in which it reported negative Q3 net income of CHF304m and positive YTD net income of CHF884m.

Moody's said that the ratings affirmation reflected the rating agency's view that Swiss Re continues to maintain an excellent business profile, and that while its financial profile has been negatively impacted by severe conditions in investment markets (annualised ROE for the first nine months of 2008 down to 4.3%), the company's financial profile, capitalisation and risk management are robust. Nevertheless, Moody's rating outlook is negative, reflecting the risk of reduced profitability going forward and the potential for available capital to continue to erode.

Moody's said that in its opinion Swiss Re continues to have an outstanding franchise in both Life and Non-Life reinsurance, with market shares of approximately 25% and 10%, respectively, writing most of its business directly and frequently being the lead reinsurer on programmes. The Group also has a strong track record as a consolidator, most recently seen in the acquisition of Barclays Life. The rating agency believes that Swiss Re is in a strong position to take advantage of any increase in the demand for reinsurance as well as any pricing improvements in its non-life business.

Moody's also said that in addition to very strong business and geographic diversification, Swiss Re's capitalisation remains excellent. On an economic basis, the Group's capital adequacy has improved substantially between 2005 and 2007 benefiting from a favorable, albeit declining, pricing environment and limited catastrophe activity in 2006 and 2007. During 2008, shareholders' equity, a meaningful component of the Group's available capital, has reduced by 24% from the YE07 level as a result of changes in unrealized gains/losses, share repurchases, foreign currency adjustments, and dividend payments, although Swiss Re's economic capital requirement has also reduced. Although the Group's economic capital adequacy ratio declined from 287% as of 31 December 2007 to 253% as of September 2008, Moody's notes that it is significantly above the Group's target range of 175-200%. The rating agency also noted that, importantly in current financial markets, Swiss Re is believed to have ample liquidity both under expected conditions and under extreme stress scenarios (where contingent funding requirements could be significant and external funding is assumed to be nonexistent). At September 30, 2008, the Group had around $20bn of spot liquidity, and access to liquidity from other unencumbered assets held centrally of around $8bn, bringing total liquidity sources to about $28bn.

According to Moody's, the negative outlook on the ratings reflects concerns in the near-to-medium term including the potential for available capital to continue to erode, lower profitability relative to the Group's 14% cross-cycle ROE target, and declining fixed charge coverage. The rating agency believes that available capital remains vulnerable to further increases in unrealised losses on Swiss Re's investment portfolio although this risk is mitigated by the full hedging of the Group's corporate bond portfolio, notwithstanding inherent basis and volatility risk in relation to the hedging. However, Moody's recognises that unrealized mark-to-market losses may not necessarily be reflective of ultimate losses. Furthermore, Moody's notes that Swiss Re has very limited listed equities exposure. With regard to profitability, ROE is now likely to be well-below 14% for 2008. Fixed charge coverage is expected to dip below 10x on a five year average basis by the end of 2008. Further, earnings, at least in the short-term, could be impacted by additional realised and unrealised mark-to-market losses on Swiss Re's asset portfolio, together with further structured CDS losses.

Moody's said that further negative rating action could occur if 1) available capital drops meaningfully from its current level such that capital adequacy deteriorates and financial metrics are pressured : 2) profitability issues persist such that the rating agency believes that the Group's cross-cycle return on equity of 14% is not achievable: and 3) the Group's fixed charge coverage ratio on a five year average basis is likely to remain in single digits going forward. In addition, the rating agency added that the affirmation of Swiss Re's ratings takes into account the expectation that the Group's Financial Services activities will continue to be more strictly tied to core reinsurance activity; any departure from this would be viewed negatively by Moody's.

The date of the previous rating action was 7 May 2008 when Swiss Re's ratings were affirmed with a stable outlook.

Swiss Re, headquartered in Zurich, Switzerland reported gross premiums written of CHF 34.4 billion, shareholders' equity of CHF 31.9 billion and net income of CHF 4.2 billion as at YE07.

The following ratings were affirmed with negative outlooks:

Swiss Reinsurance Company- insurance financial strength rating of Aa2, senior debt rating of Aa2, subordinated debt rating of A1;

European Reinsurance Company of Zurich- insurance financial strength rating of Aa2, guaranteed senior debt rating of Aa2, guaranteed subordinated debt rating of A1;

Swiss Re Europe SA - insurance financial strength rating of Aa2;

Swiss Re Germany - insurance financial strength rating of Aa2;

Swiss Re Germany Holding AG- guaranteed senior debt rating of Aa2, guaranteed subordinated debt rating of A1;

Swiss Re GB Plc- guaranteed senior debt rating of Aa2, guaranteed subordinated debt rating of A1;

Swiss Re Treasury (Luxembourg) S.A. - guaranteed senior debt rating of Aa2, guaranteed subordinated debt rating of A1;

Swiss Re America Holding Corporation - guaranteed senior debt of Aa2, guaranteed subordinated debt of A1;

Swiss Reinsurance America Corporation - insurance financial strength of Aa2;

Swiss Re Life and Health America Inc.- insurance financial strength rating of Aa2;

Swiss Re Financial Products Corporation - guaranteed senior debt of Aa2, guaranteed subordinated debt of A1;

Swiss Re Solutions Holding Corporation - senior unsecured debt of A1;

Swiss Re Finance (Bermuda) Ltd - guaranteed senior debt rating of Aa2, guaranteed subordinated debt rating of A1;

Westport Insurance Corporation - insurance financial strength of Aa2;

Swiss Re Frankona Rückversicherungs AG - insurance financial strength of Aa2;

Swiss Re Denmark Reinsurance A/S - insurance financial strength of Aa2;

Swiss Re International SE (formerly SR International Business Insurance Company plc)- insurance financial strength of Aa2;

Reassure America Life Insurance Company (formerly Valley Forge Life Insurance Company) - insurance financial strength of Aa2;

Elm BV - junior subordinated rating of A2 for notes issued by ELM BV and secured over notes of Swiss Reinsurance Company.

The following ratings were affirmed:

Swiss Re Financial Products Corporation - P-1 short-term debt rating

European Reinsurance Company of Zurich - P-1 GTD Euro Debt Issuance PRGM

Swiss Re America Holding Corporation - P-1 GTD Euro Debt Issuance PRGM

Swiss Re Finance (Bermuda) Ltd. - P-1 guaranteed short-term debt.

London
Simon Harris
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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