S&P, A.M. Best, Stock Markets React to Munich Re Announcement

July 12, 2002

The reaction to Munich Re’s announcement that it would strengthen reserves at American Re and for the WTC attacks by a total of $2.5 billion (See IJ Website July 11) had a decidedly unsettling effect. Standard & Poor’s put the triple ‘A’ rated insurer on “CreditWatch with negative implications,” while A.M. Best affirmed its A++ rating, and stock markets plunged despite the company’s upbeat profit forecasts.

“The CreditWatch placement follows Munich Re’s announcement on July 10, 2002, that case reserves and claims incurred but not reported will have to be strengthened as per June 30, 2002, at the level of core subsidiary American Re-Insurance Co. (American Re) by $2 billion,” said S&P. It also noted the additional $500 million in provisions for WTC claims, which bring Munich Re’s total loss estimate to around $2.5 billion.

S&P indicated that it was concerned over “American Re’s earnings and capital adequacy, and their impact on the Munich Re group overall,” and indicated that it planned to meet with company representatives to review the situation, and warned of a possible downgrade of American Re pending the result.

A.M. Best by contrast said that the moves would have no affect on the Group’s ratings, “reflecting its superior level of capitalization, historically excellent profitability and global market profile as the largest reinsurance organization in the world.” Best’s announcement added that “Strong first half results, which include $4.7 billion in gains from the unwinding of cross-holdings with insurer Allianz AG, are more than sufficient to absorb these charges.”

The stock markets, however, voted with their feet as shares in Munich Re lost 5.35 percent in value on the Frankfurt Stock Exchange to close at €230 ($226.50), while shares in Allianz slumped by 7.3 percent. Insurance stocks suffered an average 4 percent drop in London.

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