David Wharrier, director for Fitch Ratings in London, the analyst who compared European companies to supertankers, noted that “some are easier to turn around than others.”

Regarding the R&SA rating action, Moodys commented that despite the improvement in the groups capital position, “it has concerns about legacy issues in the United States, its ability to capitalize fully on favorable market conditions, and its ability to maintain its position and earnings in some of its core markets.”

Of particular concern for Moodys is R&SAs U.S. capital position due to “the potential for adverse loss reserve development; significant [asbestos and environmental] liabilities; reinsurance recoverables; unfunded pension liabilities; and uncertainty with respect to litigation issues facing the group.”

Commenting on the rating, R&SAs Finance Director Julian Hance said: “We have achieved most of the major objectives that we announced in our November 2002 action plan, including the IPO of our Australian operations and the sale of RSUI [its former U.S. surplus lines subsidiary], on terms generally better than anticipated, and have significantly improved the groups capital position by 900 million [$1.5 billion].”

Noting an improved first-quarter combined ratio of 99, he said, “We do not believe that there is any information that has been provided to Moodys which could have led them to this decision,” expressing disappointment that “delivered improvements to date” were not “more fully taken into account.”

Meanwhile, S&P lowered the ratings of SCOR due to the companys disappointing results, “indications of a weakened although still strong business position, and the potential for reported capital to be materially affected by further reserve strengthening,” said Marcus Rivaldi, S&Ps credit analyst in London, in a statement. S&P noted that potential strengthening relates primarily to SCORs credit derivatives portfolio and its CRP subgroup, which comprises Commercial Risk Reinsurance Co. Ltd. and Commercial Risk Reinsurance Co.

Should the balance sheet improvement occur, S&P may raise SCORs rating into the “A” range, said Mr. Rivaldi.

SCOR said it regrets the S&P decision because “it does not reflect the improvement in the groups financial condition following reserves booked and recapitalization at the end of 2002.” Further, the rating action does not reflect the impact of recovery measures introduced since that time, as part of the companys “back on track” plan adopted in November 2002.

“Regarding CRP, it was decided that this subsidiary would cease writing all further business with effect from January 2003,” SCOR said. “Commutations are now in progress, as are talks with a potential buyer.”

SCOR said it intends to maintain a prudent underwriting policy and to strengthen its balance sheet to ensure the optimum security for its customers, which is the reason it decided to spin-off its life reinsurance activities into a newly created subsidiary.

Life reinsurance is one area in which a “triple-B-plus” rating “would have a serious impact on new business,” according to Commerzbank Securities, which commented in a market letter last week that the rating is “not as bad as it could have been, but is still a challenge.”

Greg Carter, senior director of Fitch, said Fitch affirmed its “triple-B” ratings of SCOR following first-quarter results. “As a reinsurer, to be rated “triple-B” is not great. But I think one of the benefits that SCOR has is that its well supported by French institutions, certainly in terms of the capital raising exercise that it undertook towards the end of last year,” he said.

Regarding the restructuring under way in companies like Munich Re, Christopher Hitchings, European insurance analyst with Commerzbank Securities, asserted that Munich Re needs 5 billion euros ($5.7 billion) in new equity capital by the end of the year to prevent S&P from lowering its rating from the current “double-A-minus.”

In mid-June, S&P said it expects that Munich Re will restore its capital adequacy “to at least a strong level by the end of the year.” Stephen Searby, a director of S&P in London, said: “They have made considerable progress in terms of turning around their operating performance. But as we have stated publicly, we still believe further capital is required, if only to fill the hole that the obvious volatility in their asset portfolio has potential to cause.”

Mr. Hitchings predicted that Munich Re will conduct an equity issue of some sort by September.

Fitchs Mr. Wharrier said he is less concerned about Munich Res capital position. “The main issue weve got with Munich Re is earnings and whether the earnings deserve the rating of being high in the double-A range,” he said.

Munich Re has got to prove in 2003, during the top of the cycle, “that they can really generate earnings that will offset a downturn when it comes, should the rates soften over the next couple of years,” he said. He said Fitch took comfort from the 3.4 billion euros ($3.9 billion) capital raising exercise that Munich Re already completed earlier this year.

Fitchs Andrew Murray said: “For the kind of rating weve currently got them on”double-A-plus”wed be looking for them to outperform the rest of the market. Historically they probably havent really demonstrated that.”

Discussing Swiss Re, Mr. Hitchings said it now has the strongest balance sheet of any European reinsurer, although the past two years have tested the reinsurance industry to the limit. “None have emerged with their reputations intact,” he said.

“Swiss Res main issue is that its reserving base has held up well,” he said. “The only prior year reserve positioning it had to do was on a couple of problematic direct businesses and of course the pesky Lloyds Central Fund reinsurance,” he said. (Swiss Re was lead reinsurer for coverage of the Lloyds Central Fund, the subject of a coverage dispute that Lloyds has taken into arbitration.)

Further, Mr. Hitchings said, Swiss Re raised new equity late in 2001–earlier than any of the other existing reinsurers.

Mr. Searby at S&P said Swiss Res operating performance in 2002 wasnt “particularly stellar. There have been a few issues sorting out their financial services business group, which is causing a drag on profitability,” he added.

“The problems that are weighing on other parts of the industry perhaps dont weigh quite as heavily on them. But theyre certainly not immune,” he said.

Mr. Searby noted that Swiss Re has hedged down a significant portion of its equity exposure. Although the company has made no specific reserving actions, “no doubt theyve suffered like everybody else in the U.S. from the long tail liability business,” he said.

“The other thing to remember with Swiss Re is that a significant percentage of business is life reinsurance,” he said. Not only does Swiss Re have a very dominant position in life reinsurance, which is advantageous because of the prices it can charge, but unlike non-life, the business is far more stable, he said.

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.