S&P Report: Negative Outlook on Swiss Insurance Market Continues

May 24, 2005

Standard & Poor’s Ratings Services said in a recently published report that it has maintained its negative outlook on the Swiss insurance sector for both property/casualty and life. The report, “Swiss Insurance Market Portfolio Review,” is available on RatingsDirect, Standard & Poor’s Web-based credit analysis system.

“The negative outlook indicates that the potential for downgrades remains, and is in line with the current outlook for the majority of the insurance companies that Standard & Poor’s covers interactively in Switzerland,” said the bulletin. “After two years of significant negative pressures, however, companies’ restructuring measures, combined with increased capital market stability, have led to significantly improved earnings and capitalization in 2003 and 2004, alleviating some of the pressure on the industry.

“Nevertheless, the recent recovery in financials is not expected to lead to widespread upgrades, as Standard & Poor’s has already largely reflected this development in its ratings. Failure to meet expectations, on the other hand, could have negative rating implications.”

“Industry risk in life insurance is moderately high, as the industry continues to face significant operational risks due to market regulation and low growth prospects as a result of the low interest rate environment,” stated S&P credit analyst Karin Clemens. “Nevertheless, substantial restructuring measures have placed life insurers on the right track to recover from past crises.”

S&P also noted that Swiss companies “have improved the focus of their business models, significantly improved asset and risk management capabilities, cut costs, and ‘de-risked’ their balance sheets. As a result, most players reported markedly improved 2003 and 2004 year-end results and are better set to respond to the challenges of a continued complex environment.”

S&P said it “believes that underlying profitability in 2005 is likely to stabilize, given that recent results largely reflected the positive effects of restructuring. The continued absence of a transparent mechanism linking the minimum guaranteed interest rate in the mandatory occupational benefits market and the yield that can realistically be achieved in capital markets is one of the most important uncertainties for this market segment. Nevertheless, market acceptance of the need for further structural change has significantly increased and further changes in favor of the insurance industry remain a realistic possibility. Industry risk for the non-life market is considered moderately low.”

Clemens noted: “The current pricing level is seen as adequate to guarantee underwriting profitability. Furthermore, the extent of a potential rate softening is limited by the continued uncertainty of the financial market, coupled with the persistency of a high level of claims in health and accident lines.”

S&P also said that “cost cutting initiatives could still result in lower expense ratios,” and indicated that there has been “progress in profitability made in recent years,” as the “result of an overall hardening of the market coupled with a benign claims environment; cost cutting efforts were pushed ahead by streamlining organizational structures and by lowering administration costs. Nevertheless, despite the recent rates increase, competition remains high in a market where opportunities for growth are still limited.

“Capital positions have certainly improved for both life and non-life insurers in 2003 and 2004; although capital bases have been reduced from historical levels when unrealized gains on stocks represented a significant cushion to capital, improved profitability and a series of debt and equity issuances have offered an opportunity to largely rebuild capital levels.

“Financial flexibility remains constrained, as investors’ confidence is still limited. The risks arising from investment portfolios have also reduced considerably, given that, in response to the bear market, equity exposure is being more tightly managed. This will also mean that, in the future, insurance companies will not be able to rely on the high investment returns they have enjoyed in the past and underwriting rigor will be key to guaranteeing an acceptable level of profitability.”

S&P said it “views positively the introduction of a new Swiss Insurance Supervisory Law, which is expected to become effective in 2006. The law is aimed at increasing security, improving the insurers’ risk management, and expanding corporate governance. Special emphasis has also been placed on reinforcing transparency and extending customer protection. The law opens the way to a more risk-oriented approach to determining capital requirements, via the introduction of a new Swiss Solvency Test.”

The rating agency noted that it “covers interactively six insurance companies in Switzerland and 13 on a “pi” (public information) basis.”

A complete list of ratings is available on S&P’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

The report is available to subscribers of RatingsDirect, S&P’s Web-based credit research and analysis system, at: www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com.

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