S&P Lowers American Re Ratings to ‘AA-‘

November 26, 2002

Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on American Re-Insurance Co. and American Alternative Insurance Corp. (together American Re) to ‘AA-‘ from ‘AAA.’

S&P also lowered its counterparty credit and senior debt ratings on American Re Corp., a holding company which is the immediate parent of American Re to ‘A-‘ from ‘AA’. It also removed the companies from CreditWatch with negative implications, but assigned a “negative” outlook to their ratings.

American Re’s ratings were originally placed under review in July, following the announcement of a $2 billion reserve strengthening at American Re in the second quarter of 2002. S&P said the downgrade reflected “American Re’s poor operating performance in the past four years as well as Standard & Poor’s reduction in the rating support accorded to American Re from its parent company, Munich Reinsurance Co. (Munich Re), under Standard & Poor’s group rating methodology.”

“The rating action also reflects American Re’s strong, but less diversified business position as well as execution challenges related to new management’s implementation of deep structural changes aimed at improving the reinsurer’s operating results,” explained S&P credit analyst Laline Carvalho.

“Partially offsetting these factors is American Re’s strong capital adequacy following very substantial capital contributions by its ultimate parent, Munich Re, in the third quarter of 2002, as well as strong financial flexibility, reinsurance, and other intrinsic benefits the reinsurer derives as a strategic member of the Munich Re group of companies,” she continued.

S&P said it still considers American Re to be a “strategically important subsidiary” of Munich Re and indicated that it will continue “to be supported in the future should the need arise.” So far this year it’s received $1.4 billion in additional capital following the second quarter losses.

S&P’s rating system, however, requires that a subsidiary be rated at least one notch below the parent unless independent criteria support higher ratings. Although S&P affirmed Munich Re’s ‘AAA’ rating last September, it apparently feels that American Re still has a ways to go in improving its financial results. The present goal is to reduce its combined ratio to 102 percent for the current year.

S&P indicated that this remains problematic, and therefore assigned the ratings a negative outlook. This “reflects uncertainty related to American Re’s ability to successfully turn around its operating performance and fully implement its new strategic plan following four consecutive years of operating losses.” The announcement also noted that “further reserve strengthening for claims from past years,” might continue to affect American Re, although S&P doesn’t think they will be of the same magnitude as it recorded this year. “A track record of solid earnings will be necessary for the outlook to be revised to stable,” S&P concluded.

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