Global ratings agency Fitch has revised reinsurance giant Swiss Re’s outlook to positive from stable, reflecting the firm’s “strongly improved financial performance and better capitalisation and leverage.”
Alongside the revision to positive, Fitch has affirmed Swiss Re’s Insurer Financial Strength (IFS) Rating at ‘A+’ (Strong) and Long-Term Issuer Default Rating (IDR) at ‘A’, which reflects its ‘Most Favourable’ company profile, ‘Strong’ capitalisation and leverage, and ‘Strong’ financial performance and earnings.
Swiss Re posted net income of $2.5 billion for the first nine months of 2023, and Fitch expects the reinsurer to record a significant recovery in earnings for the full-year, as well as additional albeit more marginal improvements in 2024, driven by firm premium rates in P&C, lower excess mortality claims in L&H, and stronger investment returns.
Fitch also expects the company’s capital adequacy to improve at year-end 2023 and in 2024 on higher earnings, assuming a normal level of major losses. In fact, the group’s Swiss solvency test (SST) ratio rose to 314% at end of June 2023 from 294% at year-end 2022 on higher interest rates and lower financial market risk.
Further, the firm’s financial leverage ratio (FLR) was 32% at year-end 2022 compared with 31% at year-end 2021, which is high for the ratings.
“Fitch expects the FLR to fall below 30% at end-2023 on the recently completed USD1.5 billion tender offer on six outstanding grandfathered subordinated debt instruments and to fall further in 2024 on announced deleveraging plans,” says the ratings agency.
In terms of reserve adequacy, Fitch views Swiss Re’s reserving as prudent and supportive of the ratings. The firm strengthened its reserves in P&C reinsurance in 9M 2023 by notably adding $151 million to US liability reserves in the third quarter. However, in contrast, Fitch notes that Swiss Re was able to release reserves at its corporate solutions division, shaving 1.4pp from its reported combined ratio in 9M23.
Fitch says that the consolidation of the very strong financial performance achieved in 9M 2023 on a sustained basis, while its assessment of the group’s capitalisation and leverage improves to the ‘aa’ category, could lead to positive rating action/upgrade.
However, were the firm’s financial performance to deteriorate substantially from the level achieved so far in 2023, or the firm sees a sustained deterioration in its capitalisation, or in the FLR, then it could face negative rating action/downgrade.
