moody's investors service financial institutionsb911d8da-d36b-48e4...investors service credit...

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit Strengths

» Leading global reinsurer – very strong reinsurance franchise across all major lines, supported by very strong capitalization

» Very well diversified business profile, across product/ risk type, geography and access point (i.e. reinsurance, primary, closed block)

» Very strong capital adequacy and high-quality investment portfolio

» Significant scale, diversification, and technical expertise assist in addressing industry changes

Credit Challenges

» Challenging trading environment for reinsurers: underwriting profits under pressure from lower - albeit rising- prices, whileinvestment income under pressure from low interest rates

» Inherent volatility of catastrophe exposed business and long-tailed lines of business (including life reinsurance)

» Persistent underperformance of the Group’s Corporate Solutions division, and execution risk related to plans for its repositioning

OutlookThe outlook is stable, reflecting the Group's very strong market position, extensive diversification and very strong capitalisation.

Factors that Could Lead to an UpgradeAlthough there is limited potential for further upward pressure on the ratings over the next 12 to 18 months, the following factorswould further augment the Group's credit profile:

» Increased diversification of earnings streams resulting in lower potential earnings volatility

» Sustained strong core earnings with return on capital above 10% over the underwriting cycle, while maintaining very strong capitaladequacy

» Financial and total leverage consistently below 20%, with earnings coverage over 10x through the cycle

» Material improvement in the business environment, including P&C reinsurance pricing and interest rates

Factors that Could Lead to a DowngradeThe following factors could place negative pressure on Swiss Re's ratings:

» Sustained deterioration in financial flexibility, including financial leverage above 25% and earnings coverage below 6x

» Average return on capital below 6% on a through-the-cycle basis, or persistent and significant volatility in earnings

» Material deterioration in asset quality

» Meaningful and sustained adverse reserve development

» Reduction in shareholders' equity of greater than 10% over a rolling 12 month period due to catastrophe losses or poor operatingresults

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 31 January 2020 Swiss Reinsurance Company Ltd: Update to credit analysis


However, despite its extensive diversification, Swiss Re's significant natural catastrophe exposure still gives rise to earnings volatility,as shown in 2017 and 2018, although its strong capitalisation is able to withstand high catastrophe losses. In response to rising pricesfor property-catastrophe risk, the Group has increased its gross and net natural catastrophe exposure, with net exposure (at 99.5%VaR level) to Tropical Cyclone North America (TCNA) increasing 40% to $6.5 billion at the start of 4Q 2019, from $4.7 billion at thestart of 4Q 2018. Additional increases in gross exposure have been offset by the Group’s increased use of alternative capital, throughits Alternative Capital Partners (ACP) platform. At 1 July 2019, capital relief from retrocession – mainly through ACP – amounted to20% of the gross modelled shortfall at the 99% level, up from 13% at 1 July 2018. Despite its increased nat cat exposure, the Groupexpects the impact on profitability to be limited by the fact that much of the exposure growth has been in peak risks, as opposed toworking layers, which exhibit greater frequency of loss. While we believe increased nat cat exposure is reasonable within the context ofthe Group’s excess capitalisation, we expect Swiss Re to be more exposed to lower frequency, higher severity events going forward.

Asset Quality: High quality and stable investment portfolioWe consider Swiss Re's investment portfolio to be of high quality, with 49% of its overall investment portfolio invested in cash, shortterm investments or government bonds as of H1 2019 (H1 2018: 48.5%). At YE18, Swiss Re’s high-risk asset amount (HRA, whichincludes equity, real estate and non-investment grade securities) was 45.3% of adjusted shareholders’ equity (YE17: 39.2%). TheGroup’s HRA ratio has remained relatively steady, due to the Group's adherence to its liability-driven investment approach and internalrisk limits.

In 2017, the Group announced that it had adopted investment return benchmarks that integrated environmental, social and governance(ESG) criteria. The Group believes that managing their portfolio against ESG-focused benchmarks will reduce downside risk in itsportfolio, particularly over the longer-term.

As at YE18, reinsurance recoverable amounts remained stable at around 26% of shareholders’ equity, consistent with a Aaa rating level.Goodwill & intangibles as a % of equity increased to around 48% at YE18 from 37% at YE17, driven by both an increase in the goodwill& intangibles as well as a decrease in shareholders’ equity.

Capital Adequacy: Very strong capital adequacy with SST coverage above management targetsWe consider the Group's capital adequacy to be very strong, both in absolute terms and compared to peers. As shown in Exhibit 5, theGroup’s regulatory and economic capital ratio under the Swiss Solvency Test (SST) was 241% at H1 2019 declining from 251% at year-end 2018 and 269% at year-end 2017, but remaining well above its target level of 220%. Swiss Re's SST coverage declined due to anumber of reasons, including continued dividend and share buybacks despite significantly lower profitability in 2017 and 2018, as wellas redemption of a subordinated debt instrument, the impact of further declining interest rates in 2019 and rising capital deploymentin the business to take advantage of rising prices for reinsurance. I The Group remains committed to maintaining an excess capitalposition, to enable it to take advantage of opportunities that may arise, or provide added resilience in the case of negative events.

Swiss Re’s capital adequacy is further bolstered by $2.7 billion in pre-funded facilities and $500 million in senior exchangeable notesthat are convertible into subordinated debt at the Group's option. In addition, in July 2018, the Group issued $500 million in seniorexchangeable notes that are convertible into equity at the Group's option. While these securities are relatively modest in the contextof the Group's current capital levels – Swiss Re’s SST Available Capital (risk-bearing capital, net of the market value margin), was $43.1billion, $40.6 billion, and $46.3 billion at half-year 2019, start of 2019, and start of 2018, respectively – they strengthen the Group'sfinancial flexibility and would become an important source of capital in a severe stress event.



ESG considerationsEnvironmental

Like its P&C (re)insurance peers, Swiss Re is exposed to the economic consequences of environmental risk - climate change in particular- primarily through the unpredictable effect of climate change on the frequency and severity of weather-related catastrophic events,such as hurricanes, floods, convective storms, drought and wildfires. In the ordinary course of its business, the Group undertakes anumber of steps to address the possible impacts of climate change on its underwriting risk, including typically writing one-year policieson natural catastrophe-exposed business that provide the ability to reassess risk exposures and pricing as climate conditions change,the frequent update of catastrophe and pricing models to reflect changing environmental conditions, and using retrocessional coverageto manage risk exposures. In addition, the Group's extensive diversification by geography and business line reduces its exposure to risksrelated to climate change.

Swiss Re also has opportunities to provide additional reinsurance coverage and risk transfer products to entities adopting climatechange adaptation strategies, including government programs (for example, the National Flood Insurance Program in the US) that usereinsurance as a means to manage natural catastrophe-risk.

Social

Swiss Re is exposed to social risks through both its life and P&C (re)insurance businesses. Because of the Group’s main focus onreinsurance and commercial insurance, it is not subject to the same level of conduct risk that primary insurers face related to theirsale and distribution of insurance and savings products to the public. However, Swiss Re is exposed to demographic and societaltrends, including longer lifespans and aging populations, which impact the pricing of life and health risks as insurers manage mortality,longevity and morbidity risks. Swiss Re’s large mortality book acts as a natural, albeit imperfect, hedge against its rising longevityexposures. Swiss Re's P&C business is exposed to a range of social risks, primarily through its liability and casualty exposures, whereclaims relating to the US opioid epidemic and rising jury awards in the US are examples of social issues that are giving rise to higherinsurance and reinsurance claims across the sector. Swiss Re’s extensive diversification, including within its casualty book, andsophisticated reserving practices moderates these social risks.

Governance

Like all other corporate credits, the credit quality of Swiss Re is influenced by a wide range of governance-related issues, relating tofinancial, managerial, ownership or other factors, all of which can be exacerbated by regulatory oversight and intervention.

While Swiss Re’s risk exposures are complex, the Group has strong risk management processes and internal controls that mitigatevarious governance risks. Under the oversight of its Board of Directors, the Group’s management team has a strong track record andexperience. Swiss Re operates within a strong regulatory environment, being overseen by the Swiss Financial Market SupervisoryAuthority, FINMA, and various national regulators in other jurisdictions.



© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURECREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S(COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAYNOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEEMOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’SINVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, ORPRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTSOF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS ORCOMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DONOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOTAND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS ANDPUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS ANDOTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDYAND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESSAND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENTDECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BYLAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHERTRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANYFORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.

MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM ISDEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.

All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as wellas other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information ituses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for anyindirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use anysuch information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses ordamages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of aparticular credit rating assigned by MOODY’S.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatorylosses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for theavoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents,representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDITRATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating,agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody’sinvestors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regardingcertain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publiclyreported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance —Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s InvestorsService Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intendedto be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, yourepresent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly orindirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as tothe creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and servicesrendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1207047



CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


moody's investors service financial institutionsb911d8da-d36b-48e4...investors service credit...

Documents