Moody’s has downgraded the insurer financial strength rating and long term debt ratings of Swiss Re and its subsidiaries.
At the same time it affirmed the short-term Prime-1 rating for the company.
All ratings have a stable outlook said Moody’s.
It said the ratings action reflected its view on the balance or risk and reward for reinsurers generally, which strongly influences Moody's expectations about the company's prospective operating profitability, both in terms of amount and volatility.
Moody's also noted Swiss Re's ability to organically re-generate capital more appropriately positions it at the Aa2 level, within the peer group of large global financial institutions.
The rating level also takes into account Swiss Re's numerous strengths, said the ratings agency. With its very strong business diversification, Swiss Re has an outstanding franchise and is excellently positioned to benefit from a ‘flight to quality’ in the global reinsurance industry, Moody’s said.
Moody's also commented on Swiss Re's reduced risk profile since 2001, complemented by proactive risk management and its use of capital market instruments to manage peak exposures.
Moody's said it believes that the various measures taken throughout Swiss Re to improve its operating efficiency should continue to yield positive results in the coming years.
Moody’s said Swiss Re would need to maintain pricing discipline as the market begins to soften and to offset the impact of lower investment yields.
Swiss Re will also be challenged to further improve the quality and sustainability of earnings and to enhance its return on capital while maintaining a leverage profile appropriate for the Aa rating category.
In addition, Swiss Re must continue to manage closely its evolving risk profile, in particular with regard to its growing life reinsurance and financial intermediation businesses, said Moody’s.
Lastly, the rating agency noted the potential for further adverse reserve development, especially for the underwriting years 1997-2001, in line with others in the non-life reinsurance industry.
Commenting on the prospect for future rating changes over the medium term, Moody's said that a material deviation from the expectations outlined above would likely cause a reassessment of the rating downward.
On the other hand, Moody's said that achievement of the following conditions would likely lead to a positive reassessment of the rating: capitalisation returned to historic levels of strength; core financial leverage below 10%; and sustainable returns on equity in excess of 13% over the underwriting cycle.
