S&P Lowers Munich Re Ratings to ‘A+’ – Company Response

August 28, 2003

Standard & Poor’s Ratings Services announced that it has lowered its long-term counterparty credit and insurer financial strength ratings on Munich Reinsurance Co. and related core subsidiaries of the Munich Re group, to ‘A+’ from ‘AA-‘ with a “stable” outlook.

“The downgrade primarily reflects a re-evaluation by Standard & Poor’s of reinsurance industry risk, and of Munich Re’s position within that industry following the historic relative underperformance in its nonlife underwriting profitability,” stated S&P credit analyst Nigel Bond.

As recently as September 2002 Munich Re had S&P’s highly coveted ‘AAA’ rating, but a series of losses, deepened by stock market declines, which forced the company to write down the values of its equity holdings, led the rating agency to lower the rating to ‘AA+’ last December. It again downgraded Munich Re to ‘AA-‘ in March. It explained this latest downgrade as reflecting “the slower-than-expected recovery in Munich Re’s earnings and the impact this could have on the group’s ability to replenish capital during the current hard phase of the cycle.”

The world’s biggest reinsurer was not pleased. “Downgrading by S&P fails to take account of the strengths of the Group,” was the headline on a news release the company issued in response. “Munich Re considers the downgrading announced by S&P [from AA- to A+ (strong), outlook ‘stable’] to be unjustified and the reasons given for this measure to be unconvincing,” said the bulletin. It noted that “The Group’s equity funds increased in the second quarter 2003 by around 50% to over euro 18bn [$19.6 billion] partly due to the heavily oversubscribed bonds issued in mid-April and partly as a result of the upswing in the stock market since the start of the second quarter.”

S&P tempered the downgrade with the reminder that “Nevertheless, the ratings remain underpinned by Munich Re’s very strong business position.” It also indicated that it does expect the company “to improve earnings, rebuild capital, and maintain its very strong business position in both the nonlife and life reinsurance markets.” It also expects “operating results to rebound significantly for the year ending Dec. 31, 2003, as the impact of price increases and tighter terms and conditions continues to take effect.”

In Munich Re’s view much of that has already happened. It pointed out that “The company’s internal risk model with its high security level evinces a totally adequate level of capitalisation. The decisive factor here is the global diversification of the reinsurance portfolio with its particularly high risk-bearing capability. A further factor is that the Munich Re Group’s well-balanced structure in international reinsurance and in European personal lines insurance business offers additional risk diversification and thus added security.”

It also stressed that its combined ratio in reinsurance was 95.9 percent, and its primary insurance combined ratio was 96 percent, well under S&P’s 100 percent target. It also pointed out that “The reasons for the striking improvement in reinsurance are not only an increase in premiums but also a package of loss-reducing measures in treaty constructions. This also lends sustainability to the increase in profit. Our largest international subsidiary, American Re in Princeton, is also making headway. Since early 2002 major changes to the management team and the business focus were made, resulting in a profit since the beginning of this year.”

CEO Dr. Hans-Jürgen Schinzler commented: “All in all, Munich Re is a group that is virtually unparalleled among international financial service providers with regard to quality, experience, global structure and networking. Clients, investors as well as applicants on the job market underline this point every day through their strong demand. It is regrettable that the standard model agency Standard & Poor’s obviously fails to take account of the strengths of Munich Re. We will be continuing our discussions with the rating agency regarding this point.”

The company may also be hedging its bets. There were reports earlier in the week, mainly from the Financial Times Deutschland, that the company is considering a hybrid debt/equity issue to raise up to 4 billion euros ($4.35 billion) in order to strengthen its capital base, and, not coincidentally, to protect its ratings.

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