Best Affirms Munich Re ‘A+’ Ratings; Outlook Raised to Stable

September 10, 2007

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A+” (Superior) and the issuer credit rating (ICR) of “aa-” of Germany’s Munich Reinsurance Company and its rated subsidiaries. Best also affirmed the “a” ratings of the €1.5 billion ($2.065 billion) fixed/floating rate undated subordinated bonds by Munich Re.

Best upgraded the ratings of £300 million ($608.5 million) 7.625 percent subordinated bonds and €3 billion ($4.13 billion) 6.75 percent subordinated Eurobonds issued by Munich Re Finance B.V. to “a+” from “a,” “in order to reflect the ranking of debt relative to policyholder obligations of German reinsurers,” Best explained. The outlook on all ratings has been revised to stable from negative.

“The ratings reflect Munich Re’s unchanged risk-adjusted capitalization, continuing excellent operating performance and very strong business profile in the reinsurance segment,” said Best. “The ratings also factor the company’s planned share buy-backs and continuing exposure to large natural catastrophes losses.”

The bulletin indicated that Best had taken into account Munich Re’s program to repurchase some of it shares, indicating that the reinsurer’s “risk-adjusted capitalization remains unchanged.” Best also noted said it believes “Munich Re’s asbestos and environmental related claims reserves have stabilized,” but there is “a potential for adverse development as uncertainties regarding the development of claims inflation and claims pattern persist.”

Munich Re’s recent strong operating performance also supports the “A+” rating. Return on equity has been stable at around 14 to15 percent, while investment returns have also risen. Munich Re also profited from “a significant one-off tax benefit of approximately €400 million ($546 million) as a result of a lowering of the German corporate tax leading to a release of deferred tax liabilities,” said Best. “This compensates for a deterioration in underwriting results with a combined ratio of approximately 98 percent in 2007
(from an exceptional 93 percent in 2006) and is mainly caused by the winter storm ‘Kyrill’ and softening premium rates in reinsurance.”

Best did caution that “Munich Re remains exposed to large catastrophe losses which could have a negative impact on earnings.” This depends on how severe the 2007 hurricane season is, and whether losses exceed Munich Re’s “catastrophe loading of 7 percent of net premiums earned.”

While the life insurance market has become more competitive, Best indicated that in the primary insurance market the Munich Re Group “is not an active participant in the ongoing pricing competition in its domestic non-life market which should result in a continuing excellent underwriting performance in 2007 results.

“Munich Re maintains a very strong business position in the global reinsurance market and an excellent business profile in the domestic primary market.” Best said it “expects the company’s gross premium income to remain stable at approximately €37 billion ($50.5 billion) in 2007 as foreign acquisitions such as ISVICRE in Turkey and strong growth in emerging primary markets compensate for premium reduction in non-life reinsurance due to Munich Re’s prudent cycle management during a softening market and a decline in primary life premiums from maturing policies as new business production is not sufficient to replace existing contracts.”

The FSR of A+ (Superior) and the ICRs of “aa-” have been affirmed and the outlook has been revised to stable from negative for Munich Re and its following core subsidiaries:
New Reinsurance Company
Munich Reinsurance Italy S.p.A.
Munich Reinsurance Company of Canada
Munich American Reassurance Company
Great Lakes Reinsurance (UK) PLC

Source: A.M. Best

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