Fitch Upgrades Swiss Re to IFS ‘AA-‘; Outlook Stable

LONDON--(BUSINESS WIRE)-- Fitch Ratings has upgraded Swiss Reinsurance Company Limited's (Swiss Re) Insurer Financial Strength (IFS) rating to 'AA-' from 'A+' and affirmed its Long-term Issuer Default Rating (IDR) at 'A+'. These actions also apply to the ratings of core operating subsidiaries. The Outlooks are Stable. Fitch has simultaneously affirmed Swiss Re's senior and subordinated notes. A full rating breakdown is available at the end of this commentary.

The ratings reflect Fitch's recently updated notching criteria for the insurance sector which the agency published on 14 July, 2015. This followed publication of an initial exposure draft of proposed criteria on 12 May, 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.

The IFS upgrade reflects Swiss Re's strengthened financial profile, dominant position within the global reinsurance sector and very strong risk-adjusted capitalisation. Fitch regards Swiss Re's reinsurance operation as one of a very select group that have the scale, diversity and financial strength to attract the highest quality business being placed into the global reinsurance market. This should provide high resilience to softening pricing conditions that are being reported across several reinsurance classes.

The IFS upgrade follows the realignment exercise for reinsurers that was undertaken following the publication of Fitch's revised notching guidelines. This included an extensive peer review analysis of relative rating levels.

KEY RATING DRIVERS

The completed run-off of Swiss Re's credit derivatives portfolio and a reduction in operational debt has significantly improved the reinsurer's financial commitments; total financing and commitments (TFC) ratio fell to 0.6x at end-2014 (2013: 0.8x), which is within an acceptable range 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.

Fitch expects Swiss Re's P&C reinsurance business to remain the core earnings generator for the foreseeable future. The company's main business segment has consistently achieved strong results, both on an absolute basis and compared with peers, reflecting a depth of underwriting experience and a good diversity by reinsurance class. In 2014, underwriting remained favourable, with a reported combined ratio of 83.7% (2013: 83.8%), supported by smaller- than-expected natural catastrophe losses, which contributed 6.5% towards the combined ratio against a budgeted 9.3%.

A higher-than-expected charge of USD623m was incurred in 2014 on conclusion of several transactions with clients with respect to the pre-2004 US yearly renewable term (YRT) business, leading to an overall life & health (L&H) segment net loss of USD432m. Fitch believes that this and other management actions taken should eliminate the drag on the performance of the L&H segment and improve its results. The reinsurer has reiterated its commitment to achieving a 10% - 12% return on equity (ROE) target for 2015.

Fitch views capitalisation as very strong, despite a marginal decrease in the Prism FBM score following the expiry of the 20% retrocession quota share agreement at end-2012.

Fitch recognises that the current operating environment remains challenging for Swiss Re and the wider (re)insurance industry. Persistently low interest rates and increasingly intense competition, especially in non-life reinsurance, continue to drive price softening across certain major reinsurance classes. The agency expects Swiss Re's diversified business profile and prudent underwriting policy to provide resilience to a protracted period of price softening, should this occur.

RATING SENSITIVITIES

The key rating drivers that could result in an upgrade include: reduced financial leverage under 15% (2014: 24%); company's risk-adjusted capital position increasing to 'extremely strong', as measured by Fitch's Prism FBM; maintain strong underwriting performance relative to similarly rated peers.

The key rating drivers that could result in a downgrade include: increased financial leverage above 25%; a sustained material drop in the company's risk-adjusted capital position to below 'very strong', as measured by Fitch's Prism FBM, a marked increase in the TFC above 1.0x; or strong underperformance relative to similarly rated peers.

FULL LIST OF RATING ACTIONS

Swiss Reinsurance Company Ltd

IFS rating: upgraded to 'AA-' from 'A+'; Outlook stable

Long-term IDR: affirmed at 'A+'; Outlook Stable

Senior unsecured debt: affirmed at 'A+'

Swiss Re Corporate Solutions Ltd

IFS rating: upgraded to 'AA-' from 'A+'; Outlook Stable

Long-term IDR: affirmed at 'A+'; Outlook Stable

Subordinated debt affirmed at 'A-'

Swiss Re Treasury (US) Corp.

Senior notes affirmed at 'A+'

Aquarius + Investments PLC

Subordinated debt (XS0897406814) affirmed at 'A-'

Contingent write-off note (XS0901578681) affirmed at 'BBB+'

Cloverie PLC

Subordinated debt affirmed at 'A-'

ELM B.V.

Subordinated debt affirmed at 'A-'

Swiss Re Capital I LP

Subordinated debt affirmed at 'A-'

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 14 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868367

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988309

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988309

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings

Primary Analyst

Martyn Street, +44 20 3530 1211

Senior Director

Fitch Ratings Limited

30 North Colonnade

London, E14 5GN

or

Secondary Analyst

Brian Schneider, +1 312 606 2321

Senior Director

or

Committee Chairperson

Chris Waterman, +44 20 3530 1168

Managing Director

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Media Relations, London

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elaine.bailey@fitchratings.com

Source: Fitch Ratings