Moody’s upgrades IFS rating of Swiss Re Corporate Solutions

Moody's Investors Service has upgraded the insurance financial strength (IFS) rating of Swiss Re Corporate Solutions (SRCS) to Aa3 from A1.

In the same action, Moody's upgraded the IFS ratings of SRCS’s two main commercial insurance operating entities, Westport Insurance Corporation (WIC) and Swiss Re International (SRI), to Aa3 from A1.

The outlook for Swiss Re and its subsidiaries is stable.

The agency said the rating actions concluded a review for upgrade initiated on 15 December 2015, and reflects Moody's view of SRCS’s increasing importance to the Swiss Reinsurance Company, as a key component of its strategy to achieve growth and further diversification of its business.

Moody's said it considers SRCS to be strategically important to the group despite SRCS's moderate size relative to the overall group. Moody's added that the steady improvement of SRCS' market position and its contribution to group profitability over the past four years, together with its increasing integration into the group's operations, and the group's consistent focus on developing SRCS, validate its increased expectation of group support, in terms of capital and liquidity, if required.

In addition, Moody's noted that primary commercial insurance is increasingly viewed as a means to diversify reinsurers' portfolios and reduce dependence on the cyclical reinsurance business.

“The Aa3 IFS ratings of SRCS, WIC and SRI reflect the good stand-alone credit fundamentals of Corporate Solutions' growing commercial insurance business, which derives franchise and reinsurance protection benefits from its Swiss Re ownership, has good business diversification and profitability, and a relatively conservative investment portfolio,” it said.

Moody’s said that these strengths are partially off-set by the challenge of sustaining profitable growth in a challenging operating environment, the underwriting volatility and cyclicality inherent in a number of its commercial insurance business lines, and relatively high gross underwriting leverage.

While SRCS has a small share of the overall global market for commercial insurance, it benefits from the Swiss Re brand and ownership that enables it to write large capacity wholesale lines, as well as multi-regional coverage given the group's global footprint, according to Moody’s.

In also said that due to SRCS' strategy as a more focused commercial insurer, it has a stronger and growing market presence in its chosen market segments, which include large and upper-mid-sized corporate clients, that value the technical expertise and innovation capabilities of SRCS and the broader group.

“SRCS is well-capitalised from an economic and regulatory capital point of view, with a Swiss Solvency Test (SST) ratio, at year-end 2014, comfortably in excess of the company's target for SST of at least 160 percent,” said Moody’s.

“Supporting the company's stand-alone capitalisation are significant reinsurance agreements with the group, that include quota-share and adverse development cover on older business and meaningful excess-of-loss lines on more recent and prospective business.”

Moody’s said that while SRCS has meaningful exposure to natural catastrophe risk and writes a number of potentially volatile or cyclical lines, it considers this exposure to be manageable relative to the company's capital base, including substantial reinsurance protection.

The Aa3 IFS rating incorporates two-notches of support above SRCS' A2 standalone credit profile, and reflects Moody's opinion that there is sufficient evidence of implicit and explicit support from the group to align the IFS ratings of SRCS with the group.

In addition to the strategic importance of SRCS to the group, Moody's noted meaningful operational and management overlap between SRCS and the group, including a centralised approach to pricing and risk management, shared technical and innovation capabilities, and common board representation between SRCS and the group.

While the group's focus on SRCS as one of its three key business units has been in place since 2012, Swiss Re has a longer track-record in the commercial insurance market, having being a participant in that market for more than 20 years. Explicit support is evidenced in the substantial reinsurance protection provided by the group, including quota-share and adverse development cover on older business, said Moody’s.