Best and Moody’s Comment on Munich Re Rights Issue

October 20, 2003

Neither A.M. Best Co. nor Moody’s Investors Service indicated that Munich Re’s plans to raise over $4 billion in a rights offering to its shareholders (see previous article) would have any immediate effect on the reinsurer’s ratings.

Best’s bulletin, issued shortly after the rights issue was announced, said, “the financial strength rating of A+ (Superior) of Muenchener Rueckversicherungs-Gesellschaft (Munich Re) (Germany) remains unchanged following the proposed rights issue of ‘at least’ EUR 3.8 billion (USD 4.4 billion).”

Moody’s affirmed its Aa3 IFSR rating and A2 subordinated debt /negative outlook on Munich Re and its current A2 IFSR ratings on American Re, Aa3 IFSR on Victoria Life and Hamburg-Mannheimer, its major subsidiaries. “The rating affirmation reflects Moody’s view that the prospective capital raising exercise will be an important step in rebuilding Munich Re’s capital base which has been significantly weakened since the year 2000 due to operating losses, capital markets effects, and reserve strengthening,” said the announcement. “Furthermore, the stronger capital base will permit the company to take advantage of continued strong underwriting conditions in its core reinsurance business.”

Best said that it “believes that a successful completion of this rights issue would improve Munich Re’s consolidated risk-adjusted capital level, enabling the company to restore its reserves and further expand its business position in the world-wide reinsurance market.” It added, however, that the “the pressure on Munich Re’s consolidated earnings is likely to continue as result of significantly lower investment returns and the uncertainty regarding German tax liabilities.”

Moody’s indicated that in its opinion “Munich Re will need to maintain its current underwriting discipline in order to offset modest levels of investment income and thus enhance amount, quality and sustainability of earnings.” It also added that “a consistent track record of strong earnings coupled with continued replenishment of its capital base could lead to a positive rating action over the medium term.”

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