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Rating Action:

Moody's Downgrades Swiss Re Ratings (Senior to A1); Outlook is Negative

23 Feb 2009

Short-term ratings of P-1 affirmed

London, 23 February 2009 -- Moody's Investors Service has downgraded the insurance financial strength (IFSR) and senior debt ratings of Swiss Reinsurance Company (Swiss Re) and associated companies from Aa3 to A1. (See list below for more details.). The ratings have been assigned a negative outlook. The downgrade concludes the review for possible downgrade that was initiated on February 6, 2009. Short-term ratings of Prime-1 were affirmed.

The rating downgrade is prompted by the Group's weakening profitability, capital adequacy, and financial flexibility metrics. Going forward, Moody's expects the Group's core reinsurance activities to continue to perform well, but sees the potential in the short-term for overall profitability to be suppressed by further mark-to-market losses. Moody's also believes that, notwithstanding an excellent market position, the Group's business franchise may be weakened to an extent by its year-end 2008 results, although Swiss Re remains in a good position to take advantage of improved market conditions. The negative outlook is principally driven by the challenge of running off the Group's legacy portfolios.

Swiss Re reported a significant net loss of CHF 864 million for the full year 2008, driven by significant unrealised mark-to-market losses. In particular, the Group's Legacy unit produced mark-to-market unrealised losses for the full year 2008 of approximately CHF6 billion, including CHF2 billion on the two structured credit default swap (SCDS) transactions. The Legacy unit contains discontinued non-core activities, including the two SCDS, as well as the portfolio credit default swaps, Financial Guarantee Re and former trading activities. These losses have overshadowed good operating performance from Swiss Re's continuing operations, with a full year combined ratio of 97.9% (96.1% excluding unwind of discount), a Life & Health benefit ratio of 85.5%, and a positive total return on investments, excluding Legacy business, of 0.6%.

With regard to capital adequacy, key financial metrics such as gross underwriting leverage (4.8x at YE08 compared to 3.6x at YE07) have deteriorated, driven by a 36% reduction in shareholders' equity during 2008. Nevertheless, the gross and net natural catastrophe exposures at the 99.6% aggregate PML remain within Moody's Aa parameters. Despite the meaningful reduction in available capital, the Group's economic capital adequacy ratio of 207% at YE08 (YE07: 299%) is above the Group's target range of 175-200%.

Swiss Re has initiated capital preservation and capital raising measures including the payment of only a nominal dividend, and a CHF3bn investment by Berkshire Hathaway via a convertible perpetual capital instrument. This instrument, which will qualify for equity credit and is subject to shareholders' approval on March 13th, 2009 is taken into account by Moody's in assessing Group capital adequacy. However, the potential remains for further capital erosion in light of the nature of Swiss Re's investment and legacy portfolios, the rating agency said.

Financial flexibility metrics have also weakened. Financial leverage, which excludes the significant amount of reported operational debt of around CHF 20 billion, stood at around 18.4% at YE08 (YE07: 13.6%), a still relatively low level, but offset by negative earnings cover during 2008 with a five year average earnings cover of around 8.5x. While acknowledging the speed with which Swiss Re has managed to raise new capital, and its potential to increase share capital subject to shareholders' approval, Moody's believes that Swiss Re's capital raising options have narrowed in the event of future capital depletion. In this regard, the Berkshire Hathaway convertible investment, depending on the final terms and conditions, would bring the Group closer to Moody's 25% hybrid equity credit limit.

The rating agency also commented that in addition to excellent product risk and diversification, Swiss Re has an excellent market position and brand in both Non-Life and Life & Health reinsurance with market shares of approximately 25% and 10% respectively. Moody's had previously viewed the Group's business franchise as outstanding but is of the opinion that it may be weakened to an extent by its year-end 2008 results.

The negative outlook is principally driven by the challenge of running off the Group's legacy portfolios. Moody's believes this task is potentially complex and the costs and duration of the process are difficult to estimate with exposures representing a source of additional earnings and liquidity risk, although Swiss Re had spot liquidity of CHF17.3bn at YE08. The rating agency will closely monitor this run-off process in addition to the intended transition towards a more conservative investment portfolio. Swiss Re continues to hold a meaningful amount of non-agency structured investments (13% of invested assets at YE08) even though it has taken measures to reduce these exposures.

The rating agency said that a return to a stable outlook would be predicated upon a stable run-off process with regard to the legacy portfolios and the implementation of a clear strategic direction from the new CEO, in addition to the continuation of good performance from the group's core underwriting activities. Conversely, further negative rating action could occur should the Group encounter significant earnings, capital and liquidity pressure.

The following ratings were downgraded and assigned a negative outlook:

Swiss Reinsurance Company Ltd- insurance financial strength rating to A1 from Aa3, senior debt rating to A1 from Aa3, subordinated debt rating to A3 from A2;

European Reinsurance Company of Zurich - insurance financial strength rating to A1 from Aa3, guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re Europe SA - insurance financial strength rating to A1 from Aa3;

Swiss Re Finance (Luxembourg) S.A. - guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re Germany - insurance financial strength rating to A1 from Aa3;

Swiss Re Germany Holding AG- guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re GB Plc- guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re Treasury (Luxembourg) S.A. - guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re Treasury (US) Corporation - guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re America Holding Corporation - guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Reinsurance America Corporation - insurance financial strength rating to A1 from Aa3;

Swiss Re Life and Health America Inc.- insurance financial strength rating to A1 from Aa3;

Swiss Re Financial Products Corporation - guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Swiss Re Solutions Holding Corporation - senior unsecured debt to A3 from A2;

Swiss Re Finance (Bermuda) Ltd - guaranteed senior debt rating to A1 from Aa3, guaranteed subordinated debt rating to A3 from A2;

Westport Insurance Corporation - insurance financial strength rating to A1 from Aa3;

Swiss Re Frankona Rückversicherungs AG - insurance financial strength rating to A1 from Aa3;

Swiss Re International SE - insurance financial strength rating to A1 from Aa3;

Reassure America Life Insurance Company - insurance financial strength rating to A1 from Aa3;

Elm BV - junior subordinated rating to Baa1 from A3 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.

Swiss Re Treasury (Luxembourg) S.A. - P-1 GTD Euro Debt Issuance PRGM

Swiss Re Treasury (US) Corporation - P-1 GTD Euro Debt Issuance PRGM

P-1 short-term debt rating

Swiss Re, headquartered in Zurich, Switzerland reported gross premiums written of CHF 30.9 billion, shareholders' equity of CHF 20.5 billion and net loss of CHF 864 million as at YE08.

The date of the previous rating action was 6 February 2009 when Swiss Re's ratings were downgraded by one notch from Aa2 to Aa3 and placed on review for further possible downgrade.

The principal methodology used in rating Swiss Re was Moody's Global Rating Methodology for Reinsurers, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

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

Moody's Downgrades Swiss Re Ratings (Senior to A1); Outlook is Negative
No Related Data.
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