Best, Fitch Comment on Swiss Re’s Ratings Following GEIS Acquisition

June 13, 2006

A.M. Best Co. and Fitch Ratings have both issued statements concerning their ratings on the Swiss Re Group and its subsidiaries following the closure of the acquisition of GEIS and related entities (See IJ Website June 12). In contrast to Standard & Poor’s, who downgraded Swiss Re’s ratings from “AA” to “AA-” (See previous article), Best and Fitch maintained the ratings “under review” status.

Best said it “aims to resolve the under review status within the next four to six weeks;” while Fitch indicated that it expects to complete its analysis of the transaction “and to resolve the outstanding Rating Watches over the next few days.” Fitch’ said its ratings on Swiss Re are on “Rating Watch Negative and GE Insurance Solutions Corp’s (GE Insurance) ratings remain on Rating Watch Positive.”

Best also commented that the ratings on the newly acquired subsidiaries of GEIS -“excluding Employers Reassurance Corporation- remain under review with developing implications. These ratings apply to Employers Reinsurance Corporation and GE Reinsurance Corporation (together known as Employers Re Corp. Group), Westport Insurance Corporation and Coregis Insurance Company. The ratings of the main operating entities of the GE Frankona Group (Germany) also remain under review with developing implications.”

Best said it “believes that Swiss Re is now in a better position to make decisions about the future business strategy and future structure of the entire group.” The rating agency noted that it “continues to evaluate the potential impact of this acquisition on Swiss Re’s prospective consolidated capitalization in light of historical significant adverse reserve development at Employers Reinsurance Corporation, although the $3.4 billion reserve strengthening, which has taken place in conjunction with the acquisition, has alleviated some of the concerns.”

Best also indicated that it is “continuing to discuss with Swiss Re’s management the potential for further adverse reserve developments in Swiss Re’s liability portfolio, which in 2005, were mostly compensated by positive developments in other lines of business.”

Best’s said its “analysis also focuses on catastrophe risk management and the impact of the protection of the recently issued $950 million catastrophe bond on Swiss Re’s property catastrophe exposure” (See IJ Website June 7). Best’s analysis will also “concentrate on the relatively high execution risk inherent when merging an operation of this size and complexity, although Swiss Re has demonstrated in the past that it can successfully integrate acquisitions.”

Fitch noted that its original action in placing Swiss Re’s ratings on its Rating Watch Negative list on Nov. 18 “reflected the agency’s concerns surrounding the execution risk relating to the integration of this significant acquisition together with GE Insurance Solution’s poor record of adverse reserve development and weak earnings.” However Fitch also indicated that “partially offsetting these concerns were potential synergies that the combined group may develop, an improvement in Swiss Re’s overall diversification and scale, as well as additional pre-tax reserves of approximately $3.4 billion being provided by GE Insurance Solutions.”

Fitch said its decision to “place GE Insurance and its primary subsidiary, Employers Reinsurance Corporation (ERC), on Rating Watch Positive reflected potential benefits derived from the companies becoming a core part of a financially stronger organization with a significant and committed presence in the global reinsurance markets.”

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