Moody's: Swiss monetary policy changes are credit negative for domestic insurers

Switzerland's domestic insurers face credit-negative effects -- particularly in regard to lower retained earnings -- following the Swiss National Bank's (SNB) surprise decision last month to abandon the exchange rate peg between the Swiss franc and the euro, says Moody's Investors Service in a new report. In addition, the SNB's concurrent base rate reduction to -0.75% from -0.25% is credit negative for all insurers operating in Switzerland, because it will further reduce investment returns insurers earn on Swiss-denominated fixed-income securities.

Moody's Sector In-Depth Report -- "Swiss National Bank's Policy Changes are Credit Negative for Domestic Insurers" -- presents Moody's response to the most frequently asked questions, focusing on the implications of the SNB's decision in relation to dividend policies, earnings, capital ratios and financial flexibility.

The report is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release.

"The most significant impact is the material increase in reported dividends of Swiss domiciled groups, such as Zurich and Swiss Re, which pay dividends in Swiss francs but earn the majority of their income in other currencies," says Helena Pavicic, a Moody's Analyst and author the report.

Moody's observes that from a balance sheet perspective, the impact of the SNB monetary policy change will be limited, but the decision is credit negative for earnings of Swiss domiciled insurers. "Following the appreciation of the Swiss franc, insurers with large international operations, which are headquartered in Switzerland but do not file financial statements in Swiss francs, such as Zurich and Swiss Re, will report higher total expenses because of the increase in their reported head office costs. In contrast, non-Swiss groups with sizeable Swiss operations -- such as AXA, and to a lesser extent Allianz and Generali -- will likely report accounting currency translation benefits in their consolidated group accounts," adds Ms Pavicic.

While higher reported dividend amounts and head office costs could reduce retained earnings, Moody's expects the largest and well diversified international insurers (Zurich and Swiss Re) to remain strongly capitalised, and the rating agency predicts that the SNB's policy change will have a minimal impact on their economic capital ratios.

Moody's also believes that the impact of the SNB's policy change on Zurich and Swiss Re's financial flexibility will be modest, explaining that a 20% appreciation of the Swiss franc against the US dollar would increase total leverage of both groups by less than 1 percentage point. In addition, the rating agency observes that any adverse currency translation effect on the earnings coverage of Zurich and Swiss Re may be partially offset by lower interest payments on Swiss-franc-denominated debt instruments with Libor linked coupons since the exchange rate peg policy change coincided with a shift in the three-month Swiss franc-Libor to a range of -0.25% to -1.25% from +0.25% to -0.75%.

Subscribers can access this report via this link: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1002594