S&P Removes Munich Re from CreditWatch

Standard & Poor’s announced that it has removed its triple-‘A’ long-term counterparty credit and insurer financial strength ratings on Munich Re and its core subsidiaries from CreditWatch.

The rating agency place the Munich Re’s ratings on CreditWatch last July following its announcement that reserves at American Re-Insurance Co.(AmRe) had to be strengthened by $2 billion, and that it was increasing its WTC related claims reserves by $500 million, to $2.6 billion.

While reaffirming the triple ‘A’ ratings S&P cautioned that it still had a negative outlook for the group. Credit analyst Wolfgang Rief , explained that,”The negative outlook reflects concerns about the deterioration in the level of capitalization, which has been affected by weak capital markets, and the still-suffering earnings, despite strongly improving reinsurance terms and conditions.”

The bulletin said that the ratings on AmRe “remain on CreditWatch with negative implications, as Standard & Poor’s discussions with management have yet to be finalized, although this is expected to be completed in a matter of weeks.”

The report gave an overall picture of the group as still suffering from the traumatic events of 2001, particularly Sept. 11;. It noted that “Munich Re’s capital strength and financial flexibility have been weakened by the effects of the volatile capital markets and poor profitability. Financial leverage is moderate, and both debt and equity capital raising are available options for the company, if deemed necessary.”

Most recently the company announced a net operating loss for the second quarter of $377 million (See IJ Website Aug. 30). S&P noted that Munich Re’s “gross combined ratio was 135.1% (15.4% of which was WTC related), and the hope for recovery was again delayed.”

While acknowledging the Group’s extremely strong financial position, and its focus on primary insurance, life and pension activities, mainly through ERGO, Germany’s second largest primary insurer, it cautioned that “the ratings on Munich Re could be lowered if it fails to maintain capitalization at an extremely strong level, and provide a sustained combined ratio of 104% for reinsurance non-life business throughout the cycle starting 2002, with combined ratios of about 100% for 2003 and 2004, supported by a proven proactive cycle management.”