Moody’s has claimed that an initial public offering (IPO) of ReAssure, Swiss Re’s UK closed book business, would be credit positive for the reinsurance giant as it would reduce its exposure to credit and market risk and free up risk capital for deployment elsewhere.
Swiss Re’s Chief Executive Officer (CEO), Christian Mumenthaler, said on August 3 that the company was “not the ideal owner” of ReAssure following an announcement that the reinsurer plans to explore a potential IPO in 2019.
Moody’s noted that the Swiss Solvency Test (SST) capital regime that Swiss Re is subject to makes holding asset risk more difficult, and entails significant risk charges for asset-intensive businesses such as ReAssure.
At the beginning of 2018, credit risk and market risk accounted for around 10% and 36% of Swiss Re’s capital requirement under the SST, and these risks contribute modestly to potential volatility in the company’s SST ratio.
Moody’s observed that a 50 basis point increase in credit spreads would cause a 6 percentage point decrease in the group’s SST ratio, which stood at 269% at the start of 2018.
The IPO would also be in line with Swiss Re’s strategy of securing third-party capital investment in ReAssure. For example, MS&AD recently purchased a 15% holding in the company for £587 million, implying that ReAssure’s valuation could be approximately £3.9 billion.
Between 2017 and 2018, MS&AD’s investments in ReAssure contributed significantly to a decline in the capital Swiss Re holds against financial market and credit risk, and Moody’s expects further reductions in Swiss Re’s ReAssure stake to translate into greater reductions in its capital requirements.
Moody’s recognised that selling down its ReAssure stake will reduce Swiss Re’s share of the unit’s strong earnings, but suggested that the reduction in cashflows would be offset by the business’s continued growth under more diversified ownership.
Increased scale would also allow ReAssure to realise greater economies, but without third-party capital it’s ability to grow would be constrained by Swiss Re’s limits on credit and market risk, Moody’s said.
It explained that higher capital requirements under Solvency II have prompted UK life insurers to focus on less capital intensive business, primarily unit-linked products, and to close their traditional life and annuity books to new business.
Overall, Moody’s considers ReAssure to be well positioned to acquire and administer these closed books efficiently and profitably due to both its scale and its proven expertise in managing closed books.
