S&P Cuts Munich Re and Core Subsidiaries to ‘AA-‘

Standard & Poor’s Ratings Services announced that it has it lowered its long-term ratings, including its counterparty credit and insurer financial strength ratings, on Germany’s Munich Reinsurance Co. (MRC) and the core insurance and reinsurance subsidiaries of the Munich Re group to ‘AA-‘ from ‘AA+’. “The outlook is negative,” said S&P.

It also lowered its long-term counterparty credit rating on subholding company ERGO Versicherungsgruppe AG (ERGO) to ‘A+’ from ‘AA’, and, and its ratings on MRC’s main U.S. subsidiary, American Re-Insurance Co. to ‘A+’ from ‘AA- (see realted article in “National”). The outlook is negative for both companies.

“The rating actions follow Munich Re’s preliminary 2002 earnings release on March 27, 2003, (See IJ Website March 27) and reflect the group’s disappointing overall earnings performance for 2002, on the back of a poor 2001 and a slower-than-expected earnings recovery, and despite underlying improvements in its reinsurance business for 2002,” stated S&P credit analyst Wolfgang Rief.

S&P also noted that “the group’s capital base has weakened substantially, down from historically extremely strong levels.” Rief indicated that “The negative outlook reflects the magnitude of challenges that Munich Re faces in order to restore operating performance, improve risk-based capitalization quantitatively, and alleviate some of the uncertainties arising from its exposure both to the U.S. reinsurance market and to the German banking sector.”

S&P questioned Munich Re’s ability to achieve a combined ratio of 104 percent, and considers “it likely that it will take the group longer than expected to bring profitability back to a very strong level — particularly if the currently challenging operating and financial environment persists — thereby also delaying the group’s progress in rebuilding its capital base.”

“In addition, Standard & Poor’s expects to see strong progress in the group’s targets to achieve 15% return on economic capital, a combined ratio of about 100% for non-life reinsurance in 2003 (as contracts were priced for), and a turnaround in American Re-Insurance Co., with a combined ratio of about 97% for 2003,” the announcement continued.

“Standard & Poor’s will continue to closely monitor developments for MRC and its core companies. Failure to achieve substantial progress in improving profitability and risk-adjusted capitalization would put further pressure on the ratings,” it concluded.

Topics Reinsurance