OREANDA-NEWS. Fitch Ratings has affirmed Swiss Reinsurance Company Limited's (Swiss Re) Insurer Financial Strength (IFS) rating at 'AA-' and Long-term Issuer Default Rating (IDR) at 'A+'. Fitch has affirmed the ratings of Swiss Re's core operating subsidiaries. Fitch has also assigned ultimate holding company Swiss Re Ltd. an IDR of 'A'. The Outlooks are Stable.

Fitch has assigned Swiss Re Ltd.'s Demeter Investments B. V. (Demeter) subordinated loan notes a 'BBB' rating. The notes are rated three notches below Swiss Re Ltd.'s IDR, with two notches deducted to reflect their recovery and one notch deducted to reflect their non-performance features. This is in line with Fitch's notching criteria. Fitch has simultaneously affirmed Swiss Re's senior and subordinated notes. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

The affirmation reflects the strength of Swiss Re's financial profile, dominant position within the global reinsurance sector and very strong risk-adjusted capitalisation. Fitch regards Swiss Re's reinsurance operation as one of a very select group that have the scale, diversity and financial strength to attract the highest quality business being placed into the global reinsurance market. This should provide high resilience to softening pricing conditions that are being reported across several reinsurance classes.

Fitch expects Swiss Re's P&C reinsurance business to remain the core earnings generator for the foreseeable future. The company's main business segment has consistently achieved strong results, both on an absolute basis and compared with peers, reflecting a depth of underwriting experience and good diversity by reinsurance class. P&C reinsurance reported a Fitch-calculated FY15 combined ratio of 86% (FY14: 84%). We note that the normalised combined ratio, adjusting back for variations in reserving and major losses versus budget, deteriorated to close to 100% (breakeven), reflecting the effects of a protracted soft market. This is likely to increase the sensitivity of future underwriting profitability, to even a modest rise in major loss claims.

Life and health (L&H) reinsurance performance continues to strengthen, with FY15 operating margin improving to 9.9% (FY14: 2.6%). Fitch believes that management's actions to address underperforming business lines within the division should eliminate the drag on the performance of the L&H segment and improve its results. With return on equity (ROE) of 15.7%, the reinsurer exceeded its commitment to achieve a 10%-12% ROE target for 2015.

Fitch views capitalisation as very strong, with the reinsurer scoring 'very strong' on Fitch's Prism FBM. The strength of Swiss Re's capital position has led to confirmation from the group that it would commence a previously announced CHF1bn share buy-back programme on 12 November 2015.

Fitch recognises that the current operating environment remains challenging for Swiss Re and the wider (re)insurance industry. Persistently low interest rates and increasingly intense competition, especially in non-life reinsurance, continue to drive price softening across certain major reinsurance classes. The agency expects Swiss Re's diversified business profile and prudent underwriting policy to provide resilience to a protracted period of price softening, should this occur.

Swiss Re Ltd. has access to prefunded Tier 2 subordinated debt facilities through Demeter which are currently undrawn. Demeter, a special-purpose vehicle, will issue notes secured on Swiss Re Ltd.'s subordinated loan notes. Proceeds from Demeter's issuance are held as collateral to secure its obligation to purchase the subordinated loan notes from Swiss Re Ltd. Swiss Re Ltd. can issue subordinated loan notes on demand, at which time the eligible assets held by Demeter are transferred to the company. The subordinated loan notes include a mandatory deferral feature that would be triggered if the company were unable to meet applicable regulatory solvency requirements, as well as an optional deferral feature.

According to Fitch's rating methodology, while the facilities are undrawn, they do not receive equity credit and are not captured as part of the financial leverage calculation. Upon drawing, the assets held in the facilities transfer to Swiss Re Ltd's balance sheet, when the subordinated notes would be classified as 100% capital due to regulatory override within Fitch's risk-based capital assessment and 100% debt for the agency's financial leverage calculations.

RATING SENSITIVITIES

The key rating drivers that could result in an upgrade include: reduced financial leverage under 15% (2014: 24%); the company's risk-adjusted capital position increasing to 'extremely strong', as measured by Fitch's Prism FBM; maintaining strong underwriting performance relative to similarly rated peers.

The key rating drivers that could result in a downgrade include: increased financial leverage above 25%; a sustained material drop in the company's risk-adjusted capital position to below 'very strong', as measured by Fitch's Prism FBM, or material underperformance relative to similarly rated peers.

FULL LIST OF RATING ACTIONS

Swiss Reinsurance Company Ltd

IFS rating: affirmed at 'AA-'; Outlook Stable

Long-term IDR: affirmed at 'A+'; Outlook Stable

Senior unsecured debt: affirmed at 'A+'

Swiss Re Corporate Solutions Ltd

IFS rating: affirmed at 'AA-'; Outlook Stable

Long-term IDR: affirmed at 'A+'; Outlook Stable

Subordinated debt affirmed at 'A-'

Swiss Re Treasury (US) Corp.

Senior notes affirmed at 'A+'

Aquarius + Investments PLC

Subordinated debt (XS0897406814) affirmed at 'A-'

Contingent write-off note (XS0901578681) affirmed at 'BBB+'

Cloverie PLC

Subordinated debt affirmed at 'A-'

ELM B. V.

Subordinated debt affirmed at 'A-'

Swiss Re Ltd

Long-term IDR: assigned at 'A'; Outlook Stable

Demeter Investments B. V.

Subordinated debt assigned at 'BBB' (XS1261170515, XS1389124774, XS1423777215)