S&P: Swiss Re Ratings Unaffected by Subprime Write-Down

November 20, 2007

Standard & Poor’s Ratings Services reacted to Swiss Re’s announcement that it was writing down CHF1.2 billion ($1 billion) (See IJ web site Nov. 19) with a show of support. S&P said its counterparty credit and insurer financial strength ratings and outlook on Swiss Re, currently ‘AA-‘ and ‘A-1+’ /stable, “are unaffected” by the write down.

S&P explained that the two transactions “effectively provided protection against a fall in the market value of the reference asset portfolio, which included both subprime mortgage-related instruments and related CDOs. The mark-to-market adjustment follows the recent turmoil in debt markets, and its magnitude has been exacerbated by the illiquidity currently seen for these instruments in the secondary market.”

S&P admitted that loss had been “unexpected.” However, “despite its magnitude,” the rating agency said it “does not believe it is appropriate to take any negative ratings action at the present time, for the following reasons:
— The loss falls within the group’s articulated tolerance for credit risk. Consequently, S&P has not seen fit to lower its current “strong” assessment of the group’s enterprise risk management (ERM) capabilities.
— S&P considers the loss to be manageable in the context of the group’s very strong underlying earnings for the year to date. The reported loss (after tax) represents about 25 percent of the group’s reported net profit after tax for the nine months ended Sept. 30, 2007. Consequently, the group is still expected to meet its 13 percent target ROE for the year. As a result, Standard & Poor’s does not view this to be a capital event.

“The asset-valuation approach adopted by Swiss Re when deriving its mark-to-market adjustment appears conservative, so no further material adverse development is expected over the medium term,” S&P noted. “However, further adverse development causing the group’s aggregate mark-to-market loss to exceed its stated tolerance for credit risk would likely cause the ERM assessment to be revised to ‘adequate,’ which would place downward pressure on the ratings.”

S&P also indicated that it “expects that Swiss Re will look to revise some of its risk limits and processes in light of its renewed focus on more closely managing the volatility of its earnings going forward, which has been high relative to the ratings level over time.”

Source: Standard & Poor’s – www.standardandpoors.com

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