Fitch Revises Swiss Re's Outlook to Positive; Affirms IFS at 'A+'

Wed Aug 20, 2014 10:21am EDT

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(The following statement was released by the rating agency) LONDON, August 20 (Fitch) Fitch Ratings has revised the Outlook on Swiss Reinsurance Company Limited's (Swiss Re) Insurer Financial Strength (IFS) rating and Long-term Issuer Default Rating (IDR) to Positive from Stable. Both ratings have been affirmed at 'A+'. Fitch has simultaneously affirmed Swiss Re's senior and subordinated notes. A full list of ratings actions can be found at the end of this commentary. KEY RATING DRIVERS The revision of the Outlook to Positive reflects improvement in Swiss Re's leverage profile and earnings consistency. The affirmation is underpinned by the reinsurer's very strong risk-adjusted capitalisation and dominant position within the global reinsurance sector. In Fitch's view the business and geographic diversity of Swiss Re's property & casualty (P&C) reinsurance portfolio provides high resilience to the softening pricing conditions that are being reported across several reinsurance classes. The continued run-off of Swiss Re's credit derivatives portfolio and a reduction in operational debt both served to improve the reinsurer's leverage profile in 1H14. Fitch's total financing and commitments (TFC) ratio fell to 0.8x at end-1H14 (end-1H13: 1.3x), which is acceptable for the reinsurer's financial profile. The TFC ratio captures most forms of financial commitments, including financial debt, operational debt, securitisations, certain derivative exposures and other debt-like commitments. The strength of Swiss Re's capitalisation is viewed as a positive rating factor, despite a marginal decrease in coverage following the expiry of the 20% retrocession quota share at end-2012. As a result, Swiss Re's risk exposure to single-loss events has increased although Fitch considers this to remain within an acceptable range. The reinsurer continues to execute its financial deleveraging plans that were announced in 2013 and the actions taken to date are viewed positively by Fitch. The outcome is expected to further improve financial flexibility and efficiency across the Swiss Re group. Fitch expects that Swiss Re will continue to generate strong group earnings over the next two years, with the P&C reinsurance segment remaining as the core source of profitability. The share of casualty business within Swiss Re's reinsurance portfolio continues to grow, partly driven by the changing attractiveness between margins for property and casualty lines. Fitch expects the continued earnings strain created by declining property premium rates in mature peak-zone geographies to be partially offset by higher-margin business written in emerging market countries. The underlying performance of the life & health segment continues to improve, with the reinsurer committed to achieving a 10%-12% return on equity (ROE) target for this segment in 2015. Rebalancing of the investment portfolio is at an advanced stage and results in a marginal rise in risk assets. Fitch continues to closely monitor progress made in improving the performance of the legacy US term book, especially with regard to yearly renewable term (YRT) policies. A charge of USD500m during 2014 is expected although the final amount and timing remain uncertain. RATING SENSITIVITIES The key rating drivers that could result in an upgrade include: --Maintenance of TFC ratio below 0.8x, with other credit metrics remaining close to current levels --Reduced financial leverage to under 25% (1H14: 25.2%) --Maintenance of Swiss solvency test (SST) capitalisation above 200% (end-2013: 245%) The key rating drivers that could result in a downgrade include: --Marked increase in TFC ratio above 2.0x --Increased financial leverage above 35% --Deterioration in SST capitalisation below 175%, for example due to large losses eroding capital, or excessive growth --Weaker underwriting profitability relative to similarly rated peers Swiss Re is one of the largest global reinsurers with net premiums written of USD30.5bn in 2013 and shareholders' equity (including minority interests) of USD33bn at end-2013. The group transacts all lines of the non-life, life and health reinsurance business and has 60 representative offices. The rating actions are as follows: Swiss Reinsurance Company Ltd IFS rating: affirmed at 'A+'; Outlook revised to Positive from Stable Long-term IDR: affirmed at 'A+'; Outlook revised to Positive from Stable Senior debt issued and guaranteed by Swiss Reinsurance Company Ltd affirmed at 'A+' CHF500m 2% notes due 2015 (CH0106848481) CHF600m 2.13% notes due 2017 (CH0144934319) Senior debt issued by Swiss Re Treasury (US) Corp and guaranteed by Swiss Reinsurance Company Ltd affirmed at 'A+' USD250m 2.875% notes due 2022 (US87089HAA14 / USU7514EAU48) USD500m 4.25% notes due 2042 (US87089HAB96 / USU7514EAV21) Subordinated debt issued by Aquarius + Investments PLC and guaranteed by Swiss Reinsurance Company Ltd affirmed at 'BBB+' USD750m 6.375% contingent write-off due 2024 (XS0901578681) Subordinated debt issued by Cloverie PLC and guaranteed by Swiss Reinsurance Company Ltd affirmed at 'A-' EUR500m 6.625% notes due 2042 (XS0802738434) Subordinated debt issued by ELM B.V. and guaranteed by Swiss Reinsurance Company Ltd affirmed at 'A-' EUR1,000m 5.252% perpetual (XS0253627136) GBP500m 6.3% perpetual (XS0293392105) AUD300m 7.64% perpetual (AU3CB0024743) AUD450m perpetual (AU3FN0002531) Subordinated debt issued by Swiss Re Capital I LP and guaranteed by Swiss Reinsurance Company Ltd affirmed at 'A-' USD752m 6.854% perpetual (US87089AAA60) Contact: Primary Analyst Martyn Street Senior Director +44 (0) 20 3530 1211 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Brian Schneider Senior Director +1 312 606 2321 Committee Chairperson Chris Waterman Managing Director +44 (0) 20 3530 1168 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE. Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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