In the downgrade announcement issued on July 28, S&P said: “The downgrade primarily reflects a re-evaluation by [S&P] of reinsurance industry risk and Swiss Res position within that industry following the relative underperformance in its non-life underwriting profitability.”

If Swiss Re is being downgraded due to a re-evaluation of reinsurance industry risk, then surely other reinsurers should have been downgraded as well, contended several analysts of the industry.

“If Standard & Poors downgrades Swiss Re for industry reasons, it is somewhat strange that theres not a downgrade for the other large European reinsurer, which might suggest that theyve been apprised of the other reinsurers plans,” said Christopher Hitchings, European insurance analyst with Commerzbank Securities in London, in a not-so-veiled reference to Munich Re.

Munich Re is rated “double-A-minus” by S&P.

Stephen Searby, director of S&P in London, emphasized that the ratings agency is not reacting to any specific information, but rather that the downgrade was “part of the process of continuous surveillance.”

“An important factor in any rating is the overall inherent risk in the industry. Obviously the amount of risk to which each group is exposed will vary,” he explained.

Industry risk factors have different bearings on different groups, he said. “Therefore, we cant just simply drop every company by one notch.”

“Its important to understand that the analysis of how much the industry risk affects each individual reinsurer has to be done on a case-by-case basis,” he said.

He acknowledged that S&P is looking at the ratings of other reinsurers as well, but wouldnt be any more explicit than that.

Since the industry risk in the reinsurance industry is higher than was previously assessed, S&P is looking at each company to determine how much industry risk are these companies exposed to, he said. “Do they have a risk against the industry generally or are they enough in a niche to effectively mitigate those risks?”

S&Ps shift in the perspective of the risk of the industry came from looking at the results and looking prospectively, Mr. Searby continued.

He noted that 2003 is going to be “pretty much near the top of the cycle in terms of price anyway, although perhaps not in terms of results.”

“Its going to be a good year, but its not going to be a stellar year,” he said. “If you track that back to underwriting performance in previous years, it just doesnt look as though the operating performance of many people in the industry is going to pick up enough to make good the damage thats been done in previous years,” he added.

One analyst, who didnt want to be identified, said an industry review shouldnt be done piecemeal. “Rather than dribbling out one downgrade a month over a period of 12 months, you should get on with them,” he said.

“When re-rating companies due to industry risk, if theyre not all done at the same time, there may be a conflicting message sent to investors and policyholders. For those companies that havent been downgraded, theres a sword of Damocles hanging over their heads,” he said.

“Its very difficult to do an industry review and actually produce a completely coordinated response,” said Mr. Searby. “Sometimes thats just not possible, due to availability, manpower, etc.”

Despite the Swiss Re downgrade, Mr. Searby said, with minor exceptions, “Swiss Re is still one of the highest-rated independent reinsurers in the world.”

A Swiss Re representative said, “Swiss Re is financially very strong, a quality that is highly regarded by our clients, who continue to seek the security of Swiss Res balance sheet when purchasing insurance and reinsurance cover,” declining to otherwise comment on the ratings downgrade.

Separately, last week Swiss Re and Zurich Financial Services Group announced that Swiss Re would buy one of Zurichs UK life businesses, Zurich Life Assurance Company, in a deal valued at $460 million–$240 million to be paid by Swiss Re in cash when the deal is completed.

The deal, which follows Zurich Life's decision to close to new business, marks the first acquisition outside the United States for Swiss Res Admin Re unit. Admin Re takes on books of life and health policies that have been or will be placed into runoff, typically assuming the responsibility to administer the underlying policies.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 11, 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.