Standard & Poor’s raised long term counterparty credit and insurer financial strength rating for Swiss Reinsurance and its core subsidiaries to ‘AA-’ from ‘A+’.
The upgrade to ‘AA-‘ reflects the rating agency’s view that Swiss Re has met expectations for an upgrade since the last full review, namely by improving its financial profile, repaying the convertible perpetual capital instrument (CPCI) with Berkshire Hathaway, and continuing to generate strong operating performance characterized by strong underlying performance and improved net income.
The ratings on Swiss Re reflect the group’s very strong competitive position, very strong capitalization, and very strong non-life operating performance. They are constrained by S&P’s view that Swiss Re has yet to fully restore its financial flexibility and that the group’s life operating performance has exhibited some volatility and has not contributed to group profitability on the same scale as the non-life segment.
The legacy portfolio has been successfully reduced such that the net notional exposure is considered manageable. Swiss Re reduced this exposure by over 80% during 2010 and first-quarter 2011 to below $4 billion. The group has maintained capital adequacy significantly redundant to the ‘AAA’ confidence level despite repaying the CPCI at year-end 2010, large catastrophe losses in the first half of 2011, and widening credit spreads and equity market volatility in 2011. Swiss Re has reduced its exposure to market risk substantially by taking a more duration-matched position and keeping its equity exposure at low levels relative to other asset classes. At the same time, it has maintained very strong liquidity and high levels of cash.
2011 net income is expected to be strong and stable. At least $2.6 billion in catastrophe losses will impede 2011 net income, although about $800 million in reserve releases could partially boost this figure. Underlying operating metrics are very strong on the non-life side, but somewhat less so on the life reinsurance side in 2010 and thus far in 2011. The non-life reinsurance combined ratio for 2011 is expected to be significantly below expectations for the reinsurance market of 105%-110%. The combined ratio, excluding catastrophe losses and reserve releases, and return on equity (ROE) for the group through the first half of the year were 92.4% and 11%, respectively.
The rated entities under the two new business units, Corporate Solutions and Admin Re, created as part of the previously announced corporate restructuring, are viewed as “core” to the group rating under S&P’s group methodology criteria (see “Group Methodology,” published April 22, 2009). S&P’s view is supported by each of these units, on their own standing, being a material and integral part of the group’s existing and future operations. In addition, they share the Swiss Re brand, are heavily integrated into the group management and operational structure, contribute a material and beneficial portion of group earnings and capital, and provide a solid platform for growth and diversification for the group.
Swiss Re is expected to maintain its very strong competitive position in the life and non-life reinsurance and ILS markets. The group should maintain prudent cycle management in the current soft rating environment in the non-life space and to react quickly to exploit any material improvement in pricing. The Corporate Solutions direct non-life insurance segment will be a more prominent contributor to group earnings and premium over the next few years.
Lower reinvestment yields and non-life underwriting margins are likely to strain operating profits over the rating horizon. Non-life operating performance should remain very strong, with strong and stable net income, and a combined ratio significantly below expectations of 105%-110% for the reinsurance market. Return on revenue (ROR) and ROE should be in the high single digits for the full-year 2011, and net income should stabilize above $2.0 billion from 2012 and ROR and ROE to be above 12% and 10%, respectively, over the same period. S&P expects life operating margins to remain lower in 2011, but for ROR to be at 5% or above. More stability is expected in the life segment (including Admin Re) EVM (economic value management) income, new business to contribute $350 million per year, and for no major negative developments on previous years’ business.
The group’s capitalization should be resilient to asset-driven volatility without falling below the ‘AA’ level. Material changes to the asset allocation strategy over the rating horizon is not expected.
Positive rating action over the next 12-24 months is unlikely according to S&P. This is due to the rating agency’s view of increasing industry risk, including a challenging pricing environment in non-life lines, a low interest rate environment, and an inability to convert very strong competitive position to what is considered to be very strong operating performance. Negative rating action is also unlikely over the same time horizon. However, the ratings on Swiss Re could come under pressure if there were a material shift in the asset allocation, effectively “re-risking” to levels seen before the financial crisis, or if the group were hit by large losses that were outside its risk tolerance, thus impeding earnings and bringing its risk framework into question.
Source : Standard & Poor’s Press Release
