"The outlook revision mainly reflects uncertainty as to whether the improvement in profitability in 2003 and the first half of 2004 is sustainable over the next few years," said Standard & Poor's credit analyst Stephen Searby. Standard & Poor's believes that further improvement is necessary to bring long-term across-the-cycle operating performance to a level commensurate with the ratings. In addition, Swiss Re, in common with most of its peers, has continued to add to its prior-year reserves in response to continuing adverse development on U.S. casualty business. Although such development is not material in the context of the group's overall capital and reserves, it acts as a drag on prospective operating performance.
"The ratings reflect Swiss Re's very strong competitive position, very strong financial flexibility, and very strong risk-based capitalization," said Mr. Searby. These factors are partly offset by weaker relative long-term non-life operating profitability, and by a somewhat higher reliance (than peers) on softer forms of capital.
Maintenance of the ratings at their current level is predicated on the expectation of a material improvement in profits before tax and realized gains in 2004 (Swiss franc 1.96 billion {$1.54 billion} in 2003) and on total (life and non-life) ROR rising to about 10% (7.1% in 2003, before tax and excluding realized gains). The first-half 2004 results showed that progress was being made toward these levels, although it was a benign period for claims. Further improvements are expected in 2005 due to Swiss Re's business mix. In addition, it is expected that growth in non-life premium volumes will be less than 5% in 2004 and 2005, due to proactive cycle management. Risk-based capitalization based on Standard & Poor's model is expected to be in the 'AA' range by year-end 2004, albeit that reliance on soft forms of capital will remain high. A material shortfall on these expectations might result in the ratings being lowered.
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