Moody’s has upgraded Swiss Re’s insurance financial strength rating and senior debt rating.

It says the move to Aa3 from A1 reflects the reinsurer’s improved profitability and financial flexibility, plus an excellent market position and strong business diversification.

Swiss Re’s “good profitability has continued [this year], with a reported return on equity of 13.6%”, the ratings agency says.

“We now see little uncertainty and very small potential cost implications regarding legacy exposures related to former financial services activities that significantly affected the group’s results in 2008.”

Operational debt has fallen since 2010 and earnings coverage last year and this year has been relatively high.

Swiss Re’s financial flexibility continues to be enhanced by its access to capital markets, according to Moody’s.

Return on capital and return on equity are expected to remain good “but not at the same level” as last year and this year.

“Swiss Re, like other reinsurers, currently faces a difficult trading environment, with low investment yields a feature, [while] reinsurance pricing, especially for catastrophe business, is generally under pressure,” Moody’s says.

The reinsurer faces a credit challenge managing its pre-2004 US individual life portfolio, which has made losses since 2007.

“In light of this and the group’s catastrophe exposure, we expect Swiss Re to show some volatility in its results going forward.”