Best Affirms Munich Re’s ‘A+’ Ratings

September 26, 2008

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of Munich Reinsurance Company and its subsidiaries. Best also affirmed the debt ratings of “a+” on £300 million ($551 million) 7.625 percent subordinated bonds and €3 billion ($437 billion) 6.75 percent subordinated Eurobonds issued by Munich Re.

In addition Best noted that it has “upgraded the debt rating to “a+” from “a” on €1.5 billion [$2.186 billion] fixed/floating rate undated subordinated bonds also issued by Munich Re to reflect the ranking of debt relative to policyholder obligations of German reinsurers.”

The outlook for all of the ratings is stable.

Best also affirmed the ICR and senior debt ratings of “bbb+” of Munich Re America Corporation, and changed its outlook on both ratings to positive from stable.

Best stated: “The above ratings reflect Munich Re’s strong risk-adjusted capitalization, excellent underwriting performance and superior business profile. Munich Re remains a leading global carrier in the reinsurance market, and through its network of local subsidiaries, a dominant primary insurer in the German market, especially in health insurance.

“As part of its ‘Changing Gear’ program launched in 2007, Munich Re made several strategic business acquisitions in 2007 and 2008. These included a leading U.S. provider of the growing health insurance for seniors, a leading U.S. specialist insurer
of manufactured housing and mobile homes, a short-tail property insurance syndicate at Lloyd’s and business partnerships in India, Malaysia and South Korea.

“The group’s total written premium volume fell by less than one percent in both 2007 and the first half of 2008. This was due to difficult market conditions and the strength of the Euro against the U.S. dollar and many other currencies, particularly in the reinsurance segment where Munich Re operates on a global basis.”

In addition Best noted that Munich Re’s “risk-adjusted capitalization remains at levels appropriate for its financial strength ratings despite significant reduction in equity reserves, primarily driven by price corrections on the stock markets on non-fixed interest securities during the first half of 2008.

“The company continues to execute its series of strategic multi-year share buy back programs that started in November 2006.” Best indicated that it will continue to “monitor and evaluate the impact of these transactions on Munich Re’s risk-adjusted capitalization in light of the recent intensified stock market dislocations, or capital that may be required by its profitable growth initiative under the ‘Changing Gear’ program and any additional strategic business acquisitions.”

Overall recent Munich Re’s recent financial results have been quite good. Best said that in 2007 the reinsurer had benefited “from good business development and profitability of its life/health segment, excellent underwriting performance by its property/casualty segment and a very good investment result that exceeded its target return on investment. The group’s 2007 net income easily surpassed its target corridor for the year.”

For the first six months of 2008, Best described Munich Re as having “posted excellent underwriting results despite numerous small amounts of individual losses from a series of natural catastrophe events and man-made losses and partly benefiting from the first time consolidation of companies acquired in the United States and South Korea.”

However, Best noted that the Group’s “consolidated result for the first half of 2008 fell by 34 percent compared to the same period in 2007, primarily due to the impact on the investment result of marked price losses on the stock markets and fall in the U.S. dollar. Given the enormous scale of the turmoil on the financial markets and the resulting impairments of equities and low net gains on disposals. Best nonetheless described Munich Re’s half-year results as “satisfactory.”

Munich Re has revised its full year net profit expectation to be well over €2 billion [$2.916 billion] but below the previously set annual profit target of €3.0 to €3.4 billion [$4.375 to $4.958 billion].

“Munich Re’s asbestos and environmental-related (A&E) claim reserves have stabilized since 2006,” Best continued. “Given the latent nature of A&E exposures, evolving U.S. court decisions and indefinite nature of any future U.S. tort reform, Munich Re remains exposed to potential significant adverse development on its A&E liabilities.”

Best gave the following detailed ratings:
The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for Munich Reinsurance Company and its following core subsidiaries:
American Alternative Insurance Corporation
Great Lakes Reinsurance (UK) PLC
Muenchener Rueck Italia S.p.A.
Munich American Reassurance Company
Munich Reinsurance America, Inc.
Munich Reinsurance Company of Canada
New Reinsurance Company
The Princeton Excess & Surplus Lines Insurance Company

The following debt ratings have been affirmed:
Munich Reinsurance Company –
— “a+” on £300 million 7.625 percent subordinated bonds, due 2028
— “a+” on €3 billion 6.75 percent subordinated Eurobonds, due 2023

Munich Re America Corporation –
— “bbb+” on $500 million 7.45 percent senior unsecured notes, due 2026

The following debt rating has been upgraded:
Munich Reinsurance Company –
— to “a+” from “a” on €1.5 billion fixed/floating rate undated
subordinated bonds

The ICR of “bbb+” has been affirmed for Munich Re America Corporation.

Source: A.M. Best –

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