Fitch has affirmed the existing senior and subordinated debt instruments and assigned Swiss Re Ltd.'s Demeter Investments B.V. (Demeter) subordinated loan notes (ISIN: XS1640851983) a 'BBB' rating and Swiss Reinsurance Company Ltd's ELM B.V. subordinated notes (ISIN: XS1209031019) an 'A-' rating.
KEY RATING DRIVERS
The affirmation reflects the strong franchise of Swiss Re, its very strong business profile within the global reinsurance industry, its consistently strong financial performance and very strong capitalisation.
Fitch views Swiss Re as one of a small group of reinsurers with the scale, quality and financial strength to attract the highest-quality business. Business diversification is a positive rating factor, with Swiss Re writing a combination of property & catastrophe (P&C) and life reinsurance, as well as primary business. We expect Swiss Re's earnings generation to remain strong despite pricing pressure in certain parts of the reinsurance market.
Fitch views Swiss Re's capitalisation as 'Very Strong' based on the agency's Prism Factor Based Model (FBM). Total shareholders' equity declined slightly to USD34.1 billion (2016: USD35.6 billion) due to large catastrophe losses. However, required capital also fell as Swiss Re exited under-performing accounts, leaving capital adequacy unchanged. Under the Swiss Solvency Test, the group reported a coverage ratio of 262% at end-2017 (end-2016: 261%), significantly better than its economic capitalization target of 220%.
The reported combined ratio for P&C reinsurance worsened to 112% in 2017 (2016: 94%), driven by an increase in major loss activity. Normalized for reserve variations and major losses, the metric remained stable at 100% (2016: 99.8%), reflecting the continued underlying effects of a protracted soft market. The Corporate Solutions segment was also significantly impacted by large catastrophe losses in 2017. The overall reported combined ratio for the segment increased to 133% in 2017 (2016: 101%).
Life & Health reinsurance performed well in 2017, with Swiss Re reporting a net income of USD1.1 billion for the segment (2016: USD0.8 billion), driven by strong investment performance, following realized gains from sales of equity securities, and a stable underwriting result. The return on investment for the segment was 4.3% in 2017 (2016: 3.6%). Premiums earned, and fee income increased to USD12 billion (2016: USD11.5 billion).
Fitch recognizes that the current operating environment remains challenging for Swiss Re and the wider (re)insurance industry. The natural catastrophe events in 2017 led to rate increases for property classes in loss-affected markets but rate improvement has been more modest in other markets. Overall, Swiss Re reported prices were up by 2% with more pronounced increases in the loss-affected lines. Swiss Re estimates that its P&C reinsurance's combined ratio will be 99% in 2018, assuming normal levels of catastrophe activity.
The 'BBB' rating on Swiss Re Ltd.'s Demeter Investments B.V. (Demeter) subordinated loan notes is three notches below Swiss Re Ltd.'s IDR of 'A', comprising two notches to reflect our baseline recovery assumption of 'poor' and one notch to reflect their non-performance risk. According to Fitch's rating methodology, while the facility is undrawn, it does not receive capital credit and is not captured as part of the financial leverage calculation. Upon drawing, the assets held in the facility transfer to Swiss Re Ltd's balance sheet, when the subordinated notes would be classified as 100% capital due to regulatory override within Fitch's risk-based capital assessment and 100% debt for our financial leverage calculations.
The 'A-' rating on Swiss Reinsurance Company Ltd's ELM B.V. subordinated notes is two notches below Swiss Reinsurance Company Ltd's IDR of 'A+', with one notch to reflect our baseline recovery assumption of 'below average' and one notch to reflect their non-performance risk. The notes are classified as 100% capital due to regulatory override within Fitch's risk-based capital assessment and 100% debt for our financial leverage calculations.
RATING SENSITIVITIES
The key rating drivers that could result in a downgrade include increased financial leverage above 25%; a sustained material drop in the group's risk-adjusted capital position to below 'Very Strong', as measured by Prism FBM; a combined ratio consistently above 100%, and a net income return on equity consistently below 6%.
The key rating drivers that could result in an upgrade include lower financial leverage to below 15% or the group's risk-adjusted capital position increasing to 'Extremely Strong', as measured by Prism FBM.
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