Best Affirms Swiss Re, GEIS, GE Frankona Ratings; Off Review

August 24, 2006

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A+” (Superior) and the issuer credit rating (ICR) of “aa” of Swiss Reinsurance Company and its rated subsidiaries. Best also affirmed all debt ratings either issued or guaranteed by Swiss Re, and removed them from under review where they were placed on November 18, 2005 with negative implications. In addition Best said it has “assigned a negative outlook to Swiss Re’s ICRs and debt ratings and a stable outlook to the FSRs.”

At the same time Best removed from under review and affirmed the rated subsidiaries of GE Insurance Solutions Corporation (GEIS) with a stable outlook. “This rating action includes the affirmation of the FSR of ‘A’ (Excellent) and the ICR of “a” of Employers Reinsurance Corporation, GE Reinsurance Corporation and First Specialty Insurance Corporation (together known as Employers Re Corp Group [ERC]), and Westport Insurance Corporation,” said Best. ” It also covers the affirmation of the FSR of “B+” (Very Good) and the ICR of “bbb-” of Coregis Insurance Company. The ICR and debt ratings of GEIS have also been removed from under review and affirmed with a stable outlook.

Finally, Best said it has affirmed the FSRs of “A”(Excellent) and the ICRs of “a” of the main operating entities of the German-based GE Frankona Group, and has removed the from under review, with a positive outlook.

“The rating actions on GE Frankona reflect A.M. Best’s stand-alone assessment of the rated entities,” said the bulletin. “Historically, the ratings benefited from a guarantee provided by Employers Reinsurance Corporation; however, this agreement was cancelled following the acquisition by Swiss Re. A.M. Best has factored some rating enhancements based on the expectation that Swiss Re will support the acquired European entities.”

Best noted that its “rating actions on Swiss Re reflect the maintenance of a very strong consolidated risk-adjusted capitalization, the company’s enhanced business position following the acquisition of GEIS and an improving operating performance.

“The negative outlook on Swiss Re’s ICR reflects A.M. Best’s concerns regarding the execution risk given the size and complexity of the GEIS subsidiaries.”

Best’s analysis – slightly amended – of the newly enlarged Swiss Re Group, following the completion of the GEIS acquisition is as follows:

Very strong risk-adjusted capitalization—In A.M. Best’s view, Swiss Re’s risk-adjusted capitalization remains very strong following the acquisition of GEIS, despite higher capital requirements from an increased exposure of the combined group to natural catastrophes and other acquisition effects, in particular increased goodwill of CHF 1.6 billion ($1.3 billion) and internal financing of $1.2 billion. In Best’s opinion, financial leverage remains within the tolerance levels for an ICR of “aa”. Swiss Re has assumed approximately $1.7 billion of debt as part of the acquisition and has issued approximately CHF 4 billion ($3.2 billion) in hybrid equity (mandatory convertible and subordinated debt) to finance the transaction. Best has credited hybrid equity up to 20 percent of total adjusted capital. A partially offsetting factor is Swiss Re’s reliance upon softer elements on capital (such as goodwill, DAC and PVFP).

Best believes the newly combined group continues to face uncertainties regarding future claims reserve developments of its U.S. book of business. In particular, ERC had experienced significant adverse developments in the past, although the additional reserve strengthening at year-end 2005 (by $3.4 billion) alleviated some of the concerns. Swiss Re also strengthened its U.S. liability reserves for the underwriting years by CHF 1 billion ($800 million) at year-end 2005; however, this was—to a large extent—compensated by positive run-offs in other lines of business. In the first six months of 2006, Swiss Re reported no prior year claims reserve development.

Enhanced business profile—A.M. Best believes that the acquisition of GEIS provides Swiss Re with better access to the U.S. broker market and diversifies its portfolio. GEIS wrote approximately $5.66 billion in net earned premiums in 2005 (excluding U.S. life and health). Swiss Re is currently reviewing this portfolio, which comprises business segments such as retrocession, London market risks and critical illness, which Swiss Re is currently not writing or only to a limited extent. Swiss Re’s non-life renewal experience in the first six months of 2006 indicates relatively stable premium development for the full year 2006 as rate increases, particularly in non-proportional property, are partially offset by higher client retention and shifts to higher layers.

Improving operating performance—Swiss Re achieved an excellent post-tax profit of CHF 1.6 billion ($1.3 billion) (which includes 21 days of GEIS’ results) in the first six months of 2006, benefiting from stable premium rates but also from benign catastrophe and a large claims environment in this period. The overall combined ratio for Swiss Re’s traditional property and casualty book of business improved by 3.3 percentage points to 93 percent in the first six months of 2006. The life and health segment also recorded excellent results with a 1.5 higher percentage points return on revenue of 11 percent.

In closing Best stressed that it “expects that property and casualty results for the full year 2006 will be largely influenced by the U.S. hurricanes season in the second half of 2006. Swiss Re has adjusted its North Atlantic hurricane modeling following hurricanes Katrina, Rita and Wilma and has recently issued $950 million in natural catastrophe protection against its four peak natural catastrophe risks. The combined group’s natural catastrophe exposure has increased in 2006, adding potential volatility to its results, although the group’s exposure protection combined with the improved diversification alleviates some of the concerns.”

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