Fitch Assigns ‘AA-‘ FSR for American Re

July 20, 2005

Fitch Ratings has assigned an ‘AA-‘ insurer financial strength rating to American Reinsurance Company (AmRe). The Rating Outlook is Stable.

Fitch’s rating on AmRe reflects its view that the company is a core subsidiary of Munich Reinsurance Company (Munich Re). As a result, Fitch has used a group rating methodology under which AmRe’s rating benefits from financial and operational links with Munich Re.

On July 19, Fitch downgraded Munich Re’s insurer financial strength to ‘AA-‘ from ‘AA’ and revised the company’s Rating Outlook to Stable from Negative. Fitch’s rating actions followed Munich Re’s announcement that AmRe, its wholly owned subsidiary, would record a net $1.4 billion charge for adverse prior-accident year reserve development in the second quarter of 2005.

Related announcements that Fitch believes support its use of a group rating methodology include the following:

* Munich Re will inject $1.1 billion of new capital into American Re;
* Munich Re will convert $1.6 billion of debt owed by AmRe into equity;
* Munich Re increases the variable quota-share reinsurance program under which it assumes business from AmRe;
* Munich Re plans to assume AmRe’s reserves for accident years 2001 and prior through a loss portfolio transfer.

Fitch notes that the loss portfolio transfer is subject to regulatory approval and AmRe’s rating is assigned with the expectation that this is concluded as intended. Material changes to the announced package of support for AmRe could lead Fitch to reconsider its rating.

Fitch views AmRe as an important platform for the Munich Re organization to pursue reinsurance operations in the large U.S. reinsurance market. In 2004, approximately 24% of Munich Re’s gross reinsurance premiums written were derived from the U.S. market.

AmRe’s recent operating results have been poor. The company’s calendar year combined ratio on a U.S. statutory basis averaged 144% between 2000 and 2004 and one year average reserve development has averaged 38% of beginning of the year surplus during that same time period.

At year-end 2004, Fitch viewed AmRe’s loss ratios for several accident years during the problematic 1997-2001 time period, as being lower than those of peers. After recording the net $1.4 billion charge, Fitch generally believes that Am Re’s accident year loss ratios will more closely approximate those of peers.

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