Moody’s Lowers Munich Re Rating to ‘Aa3’

April 7, 2003

Moody’s Investors Service announced that it has downgraded the financial strength ratings of Munich Reinsurance Company, Hamburg-Mannheimer Versicherungs AG, and Victoria Lebensversicherung AG to Aa3 from Aa1. It also lowered the financial strength rating of American Re-Insurance Company to A2 from Aa2 and the senior debt of American Re Corporation to A3 from Aa3. All ratings carry a negative outlook.

“These rating actions conclude the rating review initiated on 25 March 2003,” said the bulletin. The actions “reflect the sharp decline in Munich Re’s capitalization as of year-end 2002 and the continued pressure on its capital base over the first quarter of 2003 due primarily to the reduced value of its cross shareholdings (principally in Allianz and HVB). The negative outlook reflects the continued difficult macroeconomic environment.”

The rating agency said it expects Munich re’s earnings “to be undermined during the year 2003 by modest investment returns, while the company’s objective of achieving a combined ratio goal of 104% over the cycle remains challenging, in Moody’s view.” It also noted that “the company’s equity exposure, whilst reduced, remains high in its opinion at approximately 175% of shareholders’ equity as of year-end 2002.”

Moody’s recognized that Munich Re has “taken a proactive approach to managing its capital,” but indicated that it is “constrained in the short-term in its ability to reduce its risk-weighted assets.” Moody’s added that these factors “coupled with prospects for restrained earnings during 2003, present a significant challenge to rebuild the capital base to historic levels in the short-to-medium term.”

Moody’s said its rating actions on American Re are based primarily on concerns relating to its statutory risk-based capital position and asbestos exposures, which “are heightened by Munich Re’s reduced ability to support American Re Corp. and its subsidiaries.”

American Re’s exposure to asbestos claims remains one of the rating agency’s chief concerns. Moody’s noted that it increased steadily throughout 2002, and warned that “given the recent asbestos reserve charges taken by primary insurers, Moody’s believes there is a possibility that American Re will need to strengthen asbestos reserves over the next few years.” It also noted American Re’s dependence on Munich Re for capitalization and support.

Moody’s said “the downgrade for the ratings of Hamburg-Mannheimer and Victoria Leben from Aa1 to Aa3 largely reflects the reduced levels of capital, to varying degrees, at both entities as a result of equity market falls.” It noted that “Hamburg-Mannheimer continues to remain strongly capitalised, with a low-risk asset profile and good market position, providing considerable ratings stability looking ahead.

In the case of Victoria Leben, Moody’s believes that the rating support provided as a consequence of Victoria Leben’s strong growth franchise and key nature to the ERGO group offset the currently weakened level of capitalisation. The outlook for both entities is negative in line with the outlook for the parent group,” said the bulletin.

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