Best Puts Swiss Re Under Review

A.M. Best Co. said yesterday that it has placed the ratings of Zurich-based Swiss Re under review with negative implications after the reinsurer announced an $878 million loss from its exposure to credit default swaps linked to the subprime mortgage market collapse.

Two other rating firms, Standard & Poor's and Moody's, said previously that they were keeping their ratings for Swiss Re unchanged.

Oldwick, N.J.-based Best said it was reviewing the financial strength rating and issuer credit ratings for the reinsurer and its subsidiaries along with debt issued or guaranteed by the company.

The rating agency said the move stemmed from Swiss Re's exposures to two credit default swaps written by its Credit Solutions unit. Best said it would discuss “the potential for further write-downs arising from this exposure” with Swiss Re and that it will look to see if Swiss Re is vulnerable to other exposures.

“Although the loss does not exceed Swiss Re's credit risk tolerance, A.M. Best will further evaluate Swiss Re's enterprise risk management in light of this unexpected loss and the steps Swiss Re has taken to minimize such financial risks in the future,” the rating agency said.

In discussing Swiss Re's losses, the company's chief executive officer, Jacques Aigrain, said in a conference call this week “it is clear we made some poor choices” and the company is undergoing a review to improve the process and avoid a repeat of such a loss.

Moody's, although affirming its rating of Swiss Re, said it will re-examine the company's risk management processes, particularly those related to the Credit Solutions business. Moody's also said it will “revisit the assumptions behind the capital requirement for the Financial Services division and examine any implications in this regard for debt issuance capacity at the group level.”

S&P said the company's AA-minus/Stable/A-1-plus ratings are unaffected. Despite its magnitude, “while the loss was unexpected,” Standard & Poor's said there would be no negative ratings action because the loss is within the group's articulated tolerance for credit risk and the group has “very strong underlying earnings for the year to date.”

The rating firm noted the group is still expected to meet its 13 percent target return on equity for the year and “no further material adverse development is expected over the medium term.”