Best Affirms Munich Re ‘A+’ Ratings

Following the positive results (See related article), A.M. Best Co. affirmed the financial strength rating (FSR) of “A+” (Superior) and the issuer credit rating (ICR) of “aa-” of Germany’s Muenchener Rueckversicherung (Munich Re) and its rated subsidiaries. Best also affirmed the “a” ratings of the subordinated debt issued by Munich Re Finance B.V. and guaranteed by Munich Re. The outlook for all the ratings, however, remains negative.

“The ratings reflect Munich Re’s improved earnings, stable risk-adjusted capitalization and very strong business position,” said Best. “The outlook could be revised to stable if Munich Re continues to have solid earnings both in reinsurance and primary insurance.”

Best noted that it now “expects that Munich Re’s full year earnings for 2006 are likely to be higher than initially targeted with a return on risk-adjusted capitalization of 15 percent. A benign hurricane season in the United States, improved non-life underwriting performance in primary insurance and higher primary life/health earnings should help Munich Re to achieve an after tax profit of €2.9 billion ($3.6 billion) in the first nine months of 2006, similar to what was recorded for the full year 2005.”

Best warned, however, that it “believes there is further potential for reserve strengthening in respect of asbestos and environmental related claims in the fourth quarter of 2006, although to a lesser extent than in the past.”

Best also indicated that Eurozone interest rates and favorable equity markets “are reducing the pressure on Munich Re’s primary life earnings. As a result, profits are likely to remain stable for the full year 2006 in this segment. In primary non-life, Munich Re’s underwriting performance continues to be very strong (91 percent combined ratio in the first nine months of 2006), despite increasing pressure on premiums rates, especially in motor.”

Best’s also took the position that Munich Re’s “consolidated risk-adjusted capitalization is stabilizing, despite the planned share buy back, as a result of moderate premium growth, especially in non-life reinsurance and Munich Re’s continuous efforts to derisk its balance sheet and reduce its asset/liability mismatching.” Best said it “also believes that Munich Re’s risk management initiatives, including risk-based capital requirements, are likely to have a positive effect on the group’s risk profile and should lead to lower volatility of earnings. However, Munich Re remains exposed to the severity and increased frequency of worldwide natural catastrophes.”

In conclusion Best noted: “Munich Re enjoys a very strong business position in the worldwide reinsurance market and an excellent business profile in primary insurance in Germany.” Best said it expects consolidated gross premiums to remain stable, between €37 and €38 billion ($46-47 billion) for the full year 2006.

The report also indicated that in non-life reinsurance, “Munich Re is benefiting from strong rate increases for natural catastrophe risk, whereas premium rates for other risks remained stable overall.

“Primary life is likely to see a moderate growth in new business in 2006 due to the introduction of new products and the recent change in legislation for Riester policies, which is boosting new business in the second half of 2006.

“In primary health, the group is benefiting from uncertainty about state health insurance in Germany leading to strong demand for supplementary private health insurance. For 2007, A.M. Best expects Munich Re to adhere to its underwriting standards, despite increased pressure on premium rates at next year’s renewals.”