A.M. Best Downgrades Financial Strength and Debt Ratings of Swiss Re

October 17, 2003

A.M. Best Co. has downgraded the financial strength ratings to A+ (Superior) from A++ (Superior) of Swiss Re, Switzerland, and its core subsidiaries.

At the same time, A.M. Best has accordingly downgraded the ratings on all debt instruments issued by Swiss Re’s group entities. A.M. Best has also affirmed Swiss Re’s commercial paper program at AMB-1+. The outlook on all ratings has been changed to stable from negative.

The rating actions reflect A.M. Best’s view that Swiss Re’s prospective consolidated earnings are unlikely to be supportive of an A++ consolidated risk-based capital level throughout the cycle, especially after the reduction suffered from historic levels. Current capital could be viewed as being at an A++ level; however, the degree of “soft” capital mitigates this in part.

This fact, combined with the earnings outlook for Swiss Re and the industry, leads A.M. Best to conclude that capital levels that are more consistent with an A+ financial strength rating will be maintained prospectively. These ratings also factor Swiss Re’s superior business position in the worldwide reinsurance markets as well as the very stable and experienced management team.

Prospective earnings – 2003 half-year results generated an after-tax profit of CHF 691 million (USD 510 million), influenced by a strong performance of the life and health portfolio business (8.10% return on operating revenues). A.M. Best believes that the positive underwriting results reported in the property/casualty sector largely reflect the globally highly attractive pricing environment.

In A.M. Best’s opinion, the improvement in Swiss Re’s property/casualty underwriting performance with a combined ratio of 99.8% – from 104% at year-end 2002 – reflects a relatively slow turnaround given the current market conditions.

Prospective risk-based capitalisation – Despite the improvement in the first six months of 2003, A.M. Best believes that the current degree of consolidated earnings is unlikely to enable Swiss Re to maintain an A++ capital level throughout the underwriting cycle, particularly after reduction on historic risk-adjusted consolidated levels. Although the existing risk-based capital base could be viewed as being at an A++ level, the degree of reliance on “lower quality” or “soft” capital (i.e., deferred acquisition costs, present value of future profits and hybrid debt) in part mitigates this. A.M. Best’s view of Swiss Re’s risk-adjusted capitalisation also reflects the historical stability of its claims reserves.

Superior business profile – As the largest life and the second-largest non-life reinsurer, Swiss Re benefits from a superior brand and outstanding underwriting capabilities worldwide. A.M. Best believes the continuous focus on financial strength by reinsurance buyers is likely to further enhance Swiss Re’s business position. Gross written premiums grew by 14.8% to CHF 32.7 billion (USD 24.2 billion) in 2002 (split 62% non-life, 38% life/health in 2002). Swiss Re managed to achieve further premium increases at the January and April 2003 renewals.

Overall net premiums earned in the first six months of 2003 grew by 4 percent, including the effects of exchange rate movements (at constant exchange rates +19%), and A.M. Best expects a similar growth for the full year 2003.

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