A.M. Best Affirms Munich Re’s ‘A++’ (Superior) Rating

December 9, 2002

A.M. Best Co. has affirmed the ‘A++’ (Superior) financial strength ratings of Munich Re and its core subsidiaries with a negative outlook. Best, however downgraded Munich Re’s 1.115 billion Euro ($1.126 billion) exchange bond issue to “aa+” from “aaa,” also with a negative outlook.

“These rating actions reflect Munich Re’s superior capitalisation, superior business position in the global reinsurance market and excellent market profile in the German primary insurance segment,” said Best. “Offsetting these factors is Munich Re’s unsatisfactory, but improving underwriting performance.”

While acknowledging Munich Re’s superior capitalization, Best indicated that it has suffered some weakening due to the downturn in global equity markets, and the “necessary reserve strengthening” of around $3.4 billion at its main U.S. subsidiary American Re. “The consolidated financial leverage is below 5%,” said Best.

In a separate bulletin the rating agency announced that it had lowered American Re’s financial strength ratings to ‘A+’ (Superior) from ‘A++’ (Superior) despite the reserve strengthening. It said it now viewed American Re as being “core” rather than “strategic, as defined by Best’s group rating methodology,” to Munich Re, and indicated that the reinsurer “remains subject to uncertainty stemming from asbestos and environmental claims, as do other commercial insurers and reinsurers in the United States.”

Concerning the parent, its position as the world’s largest reinsurer means that Munich Re is in a good position to benefit from “its outstanding global network and underwriting capacity.” Best said that it believes the compan will be “one of the main beneficiaries of an increasing focus on financial strength combined with reduced capacity in the reinsurance market.”

It also noted that “In the primary insurance segment, which accounted for 43.5% of total premiums in 2001, Munich Re has an excellent market profile in Germany, where it is the third largest composite group. ERGO Versicherungsgruppe, Munich Re’s primary insurance arm, is one of the market leaders for private pensions (Riester-products) and is part of a consortium of insurers offering corporate pensions to more than three million employees of the metal industry.”

While expressing continued concern about Munich Re’s underwriting performance, Best noted that its results improved in the first nine months of 2002, “leading to a combined ratio of 102.4%.” The company is still coping with its WTC claims, the problems at American Re, and the more than $2 billion in losses it expects to eventually pay from this summer’s floods in Germany and Eastern Europe.

“The negative outlook reflects A.M. Best’s concerns that Munich Re’s risk adjusted capitalisation may further deteriorate as a consequence of continued weak equity markets. In addition, A.M. Best sees further potential for adverse developments in respect of asbestos and environmental related claims,” said the bulletin.

Best said it would “closely monitor whether Munich Re will be able to achieve its profit targets over the next three years, which includes a 15% return on equity and a combined ratio of 100% for the next two years.” It also indicated that it “expects Munich Re’s risk-adjusted capitalisation to remain commensurate with an A++ (Superior) rating.”

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