General Insurance Article - Moody’s: Swiss Re ratings unaffected by proposed acquisition

  The acquisition will be financed 2/3 with excess cash on balance sheet and 1/3 with debt. More positively the cash generation of Admin Re is expected to increase by USD1.0 billion to USD1.7 billion in the next three years and the transaction is expected to be accretive from year one. The deal is expected to complete in early 2016, following regulatory approval.

  

 As a result of the acquisition, Admin Re will further diversify its current business in the UK. Admin Re policy count will increase by 25% to more than 4 million, and UK statutory reserves will increase by over 60% to GBP44 billion. As a result of the transaction Admin Re will take more longevity risk with annuities representing close to 40% of the pro-forma statutory reserves from 27% pre-acquisition. This diversifies somewhat with Swiss Re's life reinsurance business which has traditionally focused on providing mortality protection.

  

 Guardian is expected to generate around USD1.0 billion of gross cash, including capital synergies, between 2016 and 2018, which is c. 40% more than what Admin Re is expecting to generate on a standalone basis in the same period (USD0.7 billion). Synergies are expected to arise from (1) reduction in costs (2) capital diversification and (3) enhancement of assets by reducing the cost of managing the assets. Moody’s expects Admin Re to take more credit risk given the size of the annuity portfolio but expects credit risk to be managed conservatively. Assets under management of the Swiss Re Group will increase by GBP12.5 billion, or approximately 15%.

  

 Under US GAAP accounting standards, the acquired business will be accretive to the Group's net income from year one. On the other side, under Swiss Re's economic value management (EVM) framework, the acquisition is expected to result in an EVM loss of approximately USD0.9 billion at inception. This is because no liquidity premium is included in the interest rates used to value liabilities which are discounted at risk free interest rate. The company expects to generate a positive contribution to EVM economic net worth over time.