Re Downgrade Raises Questions

International Editor

London

Standard & Poors rationale for the recent downgrade of SwissRe from a “double-A-plus” to a “double-A” has been questioned bysome reinsurance market observers.

In the downgrade announcement issued on July 28, S&P said:“The downgrade primarily reflects a re-evaluation by [S&P] ofreinsurance industry risk and Swiss Res position within thatindustry following the relative underperformance in its non-lifeunderwriting profitability.”

If Swiss Re is being downgraded due to a re-evaluation ofreinsurance industry risk, then surely other reinsurers should havebeen downgraded as well, contended several analysts of theindustry.

“If Standard & Poors downgrades Swiss Re for industryreasons, it is somewhat strange that theres not a downgrade for theother large European reinsurer, which might suggest that theyvebeen apprised of the other reinsurers plans,” said ChristopherHitchings, European insurance analyst with Commerzbank Securitiesin London, in a not-so-veiled reference to Munich Re.

Munich Re is rated “double-A-minus” by S&P.

Stephen Searby, director of S&P in London, emphasized thatthe ratings agency is not reacting to any specific information, butrather that the downgrade was “part of the process of continuoussurveillance.”

“An important factor in any rating is the overall inherent riskin the industry. Obviously the amount of risk to which each groupis exposed will vary,” he explained.

Industry risk factors have different bearings on differentgroups, he said. “Therefore, we cant just simply drop every companyby one notch.”

“Its important to understand that the analysis of how much theindustry risk affects each individual reinsurer has to be done on acase-by-case basis,” he said.

He acknowledged that S&P is looking at the ratings of otherreinsurers as well, but wouldnt be any more explicit than that.

Since the industry risk in the reinsurance industry is higherthan was previously assessed, S&P is looking at each company todetermine how much industry risk are these companies exposed to, hesaid. “Do they have a risk against the industry generally or arethey enough in a niche to effectively mitigate those risks?”

S&Ps shift in the perspective of the risk of the industrycame from looking at the results and looking prospectively, Mr.Searby continued.

He noted that 2003 is going to be “pretty much near the top ofthe cycle in terms of price anyway, although perhaps not in termsof results.”

“Its going to be a good year, but its not going to be a stellaryear,” he said. “If you track that back to underwriting performancein previous years, it just doesnt look as though the operatingperformance of many people in the industry is going to pick upenough to make good the damage thats been done in previous years,”he added.

One analyst, who didnt want to be identified, said an industryreview shouldnt be done piecemeal. “Rather than dribbling out onedowngrade a month over a period of 12 months, you should get onwith them,” he said.

“When re-rating companies due to industry risk, if theyre notall done at the same time, there may be a conflicting message sentto investors and policyholders. For those companies that haventbeen downgraded, theres a sword of Damocles hanging over theirheads,” he said.

“Its very difficult to do an industry review and actuallyproduce a completely coordinated response,” said Mr. Searby.“Sometimes thats just not possible, due to availability, manpower,etc.”

Despite the Swiss Re downgrade, Mr. Searby said, with minorexceptions, “Swiss Re is still one of the highest-rated independentreinsurers in the world.”

A Swiss Re representative said, “Swiss Re is financially verystrong, a quality that is highly regarded by our clients, whocontinue to seek the security of Swiss Res balance sheet whenpurchasing insurance and reinsurance cover,” declining to otherwisecomment on the ratings downgrade.

Separately, last week Swiss Re and Zurich Financial ServicesGroup announced that Swiss Re would buy one of Zurichs UK lifebusinesses, Zurich Life Assurance Company, in a deal valued at $460million–$240 million to be paid by Swiss Re in cash when the dealis completed.

The deal, which follows Zurich Life's decision to close to newbusiness, marks the first acquisition outside the United States forSwiss Res Admin Re unit. Admin Re takes on books of life and healthpolicies that have been or will be placed into runoff, typicallyassuming the responsibility to administer the underlyingpolicies.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 11, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.