Best Affirms Munich Re, Subs ‘A+’ Ratings; Outlook Stable

July 21, 2009

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 (Munich Re) and its subsidiaries. Best also affirmed the debt ratings of “a+” on £300 million ($493 million) 7.625 percent subordinated bonds, €1.5 billion ($2.13 billion) fixed/floating rate undated subordinated bonds and €3 billion ($4.266 billion) 6.75 percent subordinated Eurobonds issued by Munich Re. The outlook for these ratings remains stable

Best also affirmed the ICR and senior debt ratings of “bbb+” of Munich Re America Corporation of Princeton, NJ. The outlook for these ratings remains positive.

Best explained that “Munich Re’s risk-adjusted capitalization is likely to remain strong, despite a significant reduction in equity reserves in 2008.” Best also said it “expects Munich Re to effectively manage the impact of the continuing uncertainty in the financial markets for the rest of 2009 as it shifts its investment portfolio towards lower risk fixed interest securities and loans.

“By year-end 2008, Munich Re had significantly reduced its dependency on the stock market through disposals or by means of suitable hedging instruments. In first quarter 2009, the company incurred additional reductions in equity reserves, but these were more than offset by an increase in foreign currency translation reserves.”

In addition Best said it would “continue to monitor any further write-downs in the company’s remaining non-fixed interest investment portfolio and evaluate the effect on its risk-adjusted capitalization. In May 2009, Munich Re suspended its strategic multi-year share buyback programs that started in May 2007. Shares purchased under the program had no material negative impact on its risk-adjusted capitalization.”

Best expects Munich Re’s long-term excellent underwriting performance to continue in 2009 as it “actively manages current adverse market conditions and focuses on sustainable profitable growth. In 2008, Munich Re’s overall performance was satisfactory, despite achieving a reduced consolidated result of €1.5 billion [$2.13 billion] (2007: €3.9 billion [$5.55 billion]), which fell short of its original target corridor of €3.0-3.4 billion [$4.264 to $4.835 billion] (forecast was lowered to €2.0 billion {$2.84 billion] at the half year stage).”

Best said the main reasons for the lowered performance were the “reduction in the investment result, which was significantly lower than originally expected because of turmoil in the world’s financial markets, and larger losses from natural catastrophes such as Winter Storm Emma in Europe, Australian floods and Hurricanes Gustav and Ike in the United States.

“In the midst of the continuing financial crisis, Munich Re continued to perform satisfactorily in first quarter 2009, with gross written premium growth of 5.3 percent and a quarterly profit of €420 million [$597 million]. The company’s published combined ratio was 97.3 percent for the reinsurance segment and 96.3 percent for primary insurance.”

In overall terms, best noted that 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 conducted an extensive restructuring of its reinsurance group and made several strategic business acquisitions in 2008 and first quarter 2009.

“These included the acquisition of Hartford Steam Boiler Group (HSB Group) (Connecticut) in December 2008, which was concluded at the end of first quarter 2009. HSB Group is a market leader in machinery/plant and equipment breakdown insurance and also provides inspection, certification and engineering services. This acquisition further strengthens Munich Re’s global business profile and supports its entry into the U.S. niche specialty insurance segments.

“Munich Re’s written premium volume rose by 1.5 percent in 2008 and 5.3 percent in first quarter 2009. Premium income increases were largely driven by first time consolidation of acquired companies and were partially offset by the strength of the €o against the U.S. dollar and many other currencies. The effect of the strong Euro was particularly evident in the reinsurance segment, where Munich Re operates on a global basis, and in the primary segment’s international business, in particular life insurance, where growth was especially apparent.”

Best summarized the rating s affected as follows:
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
— Munich American Reassurance Company
— Munich Reinsurance America, Inc.
— Munich Reinsurance Company of Canada
— New Reinsurance Company
— Temple Insurance Company
— The Princeton Excess & Surplus Lines Insurance Company

Best also listed the debt ratings affirmations, as detailed above.

Source: A.M. Best –

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