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Moody’s affirms Swiss Re’s financial strength; outlook negative


May 19, 2006   by Canadian Underwriter


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Moody’s Investors Service has confirmed the Aa2 insurance financial strength and senior debt ratings of Swiss Reinsurance Company in anticipation of the closing of Swiss Re’s acquisition of GE Insurance Solutions.
Moody’s also changed Swiss Re’s ratings outlook to negative.
“The decision to place the ratings on review for possible downgrade was made on 18 November 2005 in light of the announcement by Swiss Re that it had agreed with General Electric Company to acquire GE Insurance Solutions (GEIS) for US$6.8 billion,” Moody’s announced.
“At the time, Moody’s main concerns related to the execution risks associated with the transaction, particularly Swiss Re’s ability to rapidly implement its underwriting and risk management policies at the acquired entity, as well as the reserving standard at GEIS, despite the newly announced US$3.4 billion reserve strengthening.”
Having completed the review, Moody’s said the creditworthiness of the combined Swiss Re Group is consistent with a Aa2 rating level. It noted the advantages of the GEIS transaction for Swiss Re included “access to new clients and market segments where it was previously underrepresented, potential synergy benefits, and further risk diversification. The funding mix for the acquisition is conservative such that the transaction does not result in a negative effect on the financial strength of Swiss Re.”
But Moody’s also gave Swiss Re a negative outlook because of the short-term, one-off effects of the upcoming merger with GE Insurance. “The acquisition of GEIS is likely to result in somewhat subdued profitability of Swiss Re in the short term, possibly missing its cross-cycle 13% ROE target in 2006, primarily as a result of one-off restructuring charges,” Moody’s said in a statement. “In addition, there remains potential for negative surprises with respect to reserving at GEIS as Swiss Re will be completing a further thorough reserve analysis post closing.”
A stable outlook “would be predicated on the successful integration of GEIS and ability for the enlarged Swiss Re Group to achieve sustainable profitability across the reinsurance cycle as evidenced by an ROE in the low teens,” Moody’s said. Furthermore, Swiss Re Group will be expected to maintain a conservative capital structure and a financial leverage ratio in the low twenties.


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