S&P, Best Put Swiss Re’s Ratings on Negative Credit Watch

February 6, 2009

Reactions from the rating agencies to Swiss Re’s announcement of further losses (See IJ web site – https://www.insurancejournal.com/news/international/2009/02/05/97610.htm) has been swift.

A.M. Best announced that it had placed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of Swiss Reinsurance Company and its similarly rated subsidiaries under review with negative implications. Best also placed all of the debt “issued or guaranteed by Swiss Re and its subsidiaries under review with negative implications.

Standard & Poor’s Ratings Services likewise said it has placed its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on Zurich-based global reinsurer Swiss Reinsurance Co. and its core affiliates on CreditWatch with negative implications.

Best confirmed that it had taken the rating actions following “Swiss Re’s announcement of disappointing net loss for 2008, including a CHF 4.0-5.0 billion [$3.42 to $4.27 billion] erosion in shareholders’ equity in fourth quarter 2008. The latter resulted from the net loss during the quarter, unrealized capital losses on investments and the impact of exchange rate fluctuations. Net loss in fourth quarter 2008 was primarily due to mark-to-market losses recognized in income partially offset by profitable underwriting results.

S&P credit analyst Peter Grant stated: “The CreditWatch placement comes in response to Swiss Re’s disclosure that it incurred substantial additional asset write-downs during the fourth quarter of 2008, which will necessitate an increase in capital. Both the magnitude of the additional write-downs and the resulting need to raise capital are outside of our expectations.”

Best also noted that it in December it “had assigned a negative outlook to Swiss Re’s ratings due to concerns that the continuing turmoil in the financial markets could further erode Swiss Re’s capital position and negatively impact earnings in 2009. Swiss Re’s announcement today concerning its actions to initiate several asset de-risking and capital strengthening initiatives have prompted A.M. Best to place these ratings under review.”

Best also acknowledged that Swiss Re’s efforts to deal with the situation include an agreement with Berkshire Hathaway to invest CHF 3.0 billion ($2.53 billion] in Swiss Re “in the form of a 12 percent convertible perpetual financial instrument, and the purchase of a loss reserve adverse development reinsurance cover for Swiss Re’s property, casualty, credit and surety loss portfolios relating to 2008 and prior accident years.”

After Best evaluates these initiatives and their execution it will “re-evaluate Swiss Re’s risk-adjusted capitalization to determine whether it has sufficient cushion to weather more negative effects of the continuing turmoil in the financial markets as well as any other unexpected events.” Best also said it would “assess the sustainability of the group’s competitive market position, which is key to its future earnings capability and strong financial flexibility.”

S&P indicated that it expects “to be able to resolve the CreditWatch within the next two weeks. In resolving the CreditWatch, we will focus on evaluating the impact we believe today’s announcement will have on the group’s competitive position, earnings, capitalization, and financial flexibility (defined as its level of access to capital relative to its needs). Based on available information, we currently do not expect to lower the ratings by more than one notch (i.e., to below ‘A+’).”

Best listed the following ratings as being affected:
— The FSR of ‘A+’ (Superior) and ICRs of “aa-” have been placed under review with negative implications for Swiss Reinsurance Company and its following subsidiaries:
— European Reinsurance Company of Zurich
— Swiss Re Germany AG
— Swiss Re Europe S.A.
— Swiss Re International SE
— Swiss Re Life & Health Canada
— Swiss Re Life & Health America, Inc.
— Reassure America Life Insurance Company
— Swiss Reinsurance America Corporation
— North American Specialty Insurance Company
— North American Capacity Insurance Company
— North American Elite Insurance Company
— Washington International Insurance Company
— First Specialty Insurance Corporation
— Westport Insurance Corporation

Best aslo placed Swiss Re’s debt ratings under review with negative implications.

Sources: A.M. Best – www.ambest.com and Standard & Poor’s – www.standardandpoors.com

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