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Announcement:

Moody's Affirms Munich Re's Aa3 IFSR With a Stable Outlook

02 Jul 2009

London, 02 July 2009 -- Moody's Investors Service has affirmed the Aa3 insurance financial strength ratings (IFSR) of Munich Reinsurance Company (Munich Re), its US non-life reinsurance subsidiary, and its primary German life insurance subsidiaries. Munich Re's debt ratings have also been affirmed. (See list below for more details.). The rating outlook is stable.

The rating affirmation reflects Munich Re's excellent business franchise, strong business diversification and capital adequacy, excellent asset quality, together with conservative management practices. The strengths are off-set somewhat by a profitability record that Moody's believes to-date has been inconsistent with its rating level, the inherent volatility of its catastrophe exposed business, and by the challenge of reserve estimation in certain long-tail lines of business.

Munich Re is one of the leading global reinsurers with a stable franchise and Moody's views its reinsurance market position as excellent in both absolute and relative terms. This is notwithstanding the Group's desire to enhance its franchise strength in the US P&C market via increasing its broker and niche primary insurance business with recent acquisitions a feature. Via ERGO Versicherungsruppe (ERGO), the Group is also Germany's third largest insurer with a German life market share of around 7%.

Moody's also views Munich Re's business and geographic diversification as strong. The Group writes a significant amount of generally non-correlating and less volatile Life & Health reinsurance business (c.32% of reinsurance GPW at YE2008), although this business is not without risk, and has meaningful primary insurance operations, accounting for around 46% of total GPW, albeit orientated towards life and health and German business (respectively c.66% and c.74% of total primary business).

Other credit strengths for the Group include excellent asset quality with a relatively low level of reinsurance recoverables and goodwill in relation to equity, and high risk assets in relation to invested assets of below 10%. In particular, Moody's notes the meaningful reduction recently in the Group's equities exposure (only 1.4% net of hedging at Q109), the very good quality of the fixed-income portfolio around 75% of which is government/semi government and Pfandbriefe/Covered bonds, and a low amount of non-agency structured products.

Capital adequacy is viewed as strong with Munich Re's YE08 economic risk capital coverage, based on the requirements of its internal risk model (175% of VaR 99.5%) at 142% (post dividend payment and share buy-backs). This is notwithstanding a significant decline in the economic solvency ratio which stood at 199% at YE07 with available financial resources reducing by 28% during 2008, and a deterioration in Moody's capital adequacy metrics, such as gross underwriting leverage, driven by a reduction in shareholders' equity of around 16%. Moody's also notes that share buy-backs and dividend payments reduced shareholders' equity by around Eur2.5bn during 2008, an amount greater than net income of around Eur1.5bn, although notes that share buy-backs have been halted for the time being.

Off-setting these strengths somewhat is the Group's profitability, which Moody's currently views as good as opposed to excellent. Munich Re's ROE over the last five years has averaged around 11.5%, although the 2004-2007 period was generally marked by favourable capital market conditions, with the significant catastrophe activity in 2005 via KRW off-set by relatively low natural catastrophe experience in 2006 and 2007. 2008 performance was depressed in particular by falling stock markets, with ERGO's result impacted by poor investment returns and a goodwill write-down. The reported P&C reinsurance combined ratio for 2004-2008 has averaged around a high 100% compared to the current cross-cycle target of 97%, although this should be considered against the catastrophe activity in the period and Munich Re America reserve strengthening. Reserve deterioration on 2001 & prior US workers' compensation business and asbestos has been a recent feature although the Group reported an overall reserve surplus at YE08. In assessing Munich Re's profitability, Moody's considers the recent de-risking undertaken by the Group as well as the fact that Group's principal profit measure is return on risk adjusted capital (RORAC). Munich Re remains committed to achieving a 15% RORAC over the cycle.

The affirmation of the Aa3 ratings on Hamburg-Mannheimer Versicherungs AG (HMV) and Victoria Lebensversicherung AG (VL) reflect their status as core members of the ERGO Versicherungsgruppe -- the key direct insurance operations of the Munich Re group. The ratings also reflect their strong position in the German life and pensions market and the de-risked investment portfolio. More negatively, growth in the medium term is challenging for HMV and VL due to their weaker position within the unit-linked market, and profitability within the German life market remains severely constrained. IFRS profits for ERGO's life insurance group fell 92% to €19.9mn in 2008. On a MCEV basis German life insurance embedded value fell to €708mn in 2008 from €2,882mn in 2007, although Moody's notes that the very strict application of MCEV by Munich Re with respect to valuation of swap yields and volatilities impacted the result severely.

Moody's also affirmed the Aa3 insurance financial strength rating of Munich Reinsurance America, Inc. (MRAm) and the A2 senior debt rating of Munich Re America Corporation, reflecting explicit and implicit support from Munich Re and the strategic importance of the US operations within the group's global reinsurance franchise. MRAm maintains a strong position in the US reinsurance market, benefiting from long-standing client relationships developed through direct distribution of treaty and facultative reinsurance. These strengths are tempered by MRAm's history of adverse loss development for accident years 2001 and prior (a risk largely shifted to Munich Re during 2005 through a loss portfolio transfer), by the significant amount of its long-tail casualty reserves, which could be vulnerable to unexpected claims inflation and heightened litigiousness, and by the inherent volatility of catastrophe exposed business.

The rating agency noted the following factors could lead to a ratings upgrade: sustained strong core earnings with ROE in the mid-teens (14-16%) over the underwriting cycle, financial leverage in the mid- to high teens (15-19%), earnings coverage of 9-14x. Conversely, the following factors could put negative pressure on the ratings: return on equity over the underwriting cycle below 12%, financial leverage consistently above 25% and earnings coverage consistently below 9x, reduction in shareholders' equity of >10% over a 12 month period due to catastrophe losses or poor operating results.

The following ratings were affirmed with a stable outlook:

Munich Reinsurance Company - Aa3 insurance financial strength rating, A2 subordinated debt rating, A3 junior subordinated debt rating

Munich Reinsurance America, Inc.- Aa3 insurance financial strength rating

Munich Re America Corporation- A2 senior debt rating

Hamburg-Mannheimer Versicherungs AG -- Aa3 insurance financial strength rating;

Victoria Lebensversicherung AG -- Aa3 insurance financial strength rating;

Based in Munich, Germany, Munich Re reported gross premiums written of Eur37.8 bn, equity of Eur21.3bn, and net income of Eur1.5bn as at YE08.

The date of the previous rating action was 24 April 2006 when Munich Re's ratings were affirmed with a stable outlook.

The principal methodology used in rating Munich Re was Moody's Global Rating Methodology for Reinsurers, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

London
Simon Harris
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Affirms Munich Re's Aa3 IFSR With a Stable Outlook
No Related Data.
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