London, 02 October 2012 -- Moody's Investors Service has affirmed the Aa3 insurance financial strength
ratings (IFSR) of Munich Reinsurance Company ("Munich Re"
or "Group"), 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, relatively
conservative investment portfolio, together with conservative management
practices. These strengths are offset somewhat by some profitability
challenges posed by the low interest rate environment, and the inherent
volatility of its catastrophe exposed business.
Munich Re is one of the leading global reinsurers with a stable franchise
and Moody's continues to view its reinsurance market position as excellent
in both absolute and relative terms. Munich Re has a significant
market share in P&C reinsurance, and the Group writes most of
its business directly, frequently being the lead reinsurer on programmes.
Munich Re was also the leading global life reinsurer by premium during
2011, albeit with a relatively small presence in the US market-place.
The Group has also continued to enhance its franchise strength in the
US P&C market via increasing its broker and niche primary insurance
business with acquisitions a feature. Via ERGO Versicherungsruppe
(ERGO), the Group is also Germany's third largest primary insurer
with a German life market share of around 7% and a lower German
non-life market share of around 6%.
Moody's also continues to view Munich Re's business and geographic
diversification as strong. The Group writes a significant amount
of less volatile Life & Health reinsurance business (45% of
reinsurance GPW at YE11) which although not without risk, generally
has a low correlation with P&C risks. The Group's primary
insurance operations at YE11 accounted for around 39% of total
GPW, albeit orientated towards life and health and German business
(respectively c.71% and c.70% of total primary
business). Moody's views this primary insurance business
as credit positive for the Group's product risk and diversification,
although earnings diversification is relatively muted. Notably,
ERGO brings significant interest rate risk which the Group continues to
mitigate via increase of asset duration and swaptions, and opposite
interest-rate sensitivities in primary and reinsurance mitigate
sensitivity at the Group level.
Other credit strengths for the Group include excellent financial flexibility,
notwithstanding relatively low earnings cover, and a relatively
conservative investment portfolio. In particular, Moody's
notes the Group's continued low equities exposure (only 2.2%
(net of hedging) of invested assets at H1 12), the very good quality
of the fixed-income portfolio around 77% of which is government/semi
government and Pfandbriefe/Covered bonds, and a low amount of non-agency
structured products. At H1 12, total gross exposure to government
bonds issued by Ireland, Italy, Greece, Spain and Portugal
amounted to around EUR 4.5bn, and this exposure is relatively
high compared to reinsurance peers. However, at around 2%
of total invested assets and around 16% of equity (including Group
free RfB and Terminal Bonuses), Moody's views the exposure
as manageable, and notes that over 85% of the gross exposure,
which reduced during 2011 mainly through the sale of Italian government
bonds and EUR 1.2 billion of write-downs on Greek government
bonds, is subject to policyholder participation.
Capital adequacy is viewed as strong. Munich Re's YE11 economic
risk capital coverage, based on the requirements of its internal
risk model (175% of VaR 99.5%) remained above 100%
at 111% (post dividend), though reduced from 136%
at YE10 impacted, inter alia, by lower interest rates.
The Group's YE11 regulatory solvency position of 245% is
also high though reduced from 261% at YE10. Nevertheless,
the gross underwriting leverage metric for the reinsurance business is
somewhat high at 3.7x (YE10: 3.4x), although
the Group's natural catastrophe exposures on a combined gross and net
basis at the 99.6% aggregate PML remain within Moody's Aa
parameters.
Off-setting these strengths somewhat are some profitability challenges
posed by the low interest rate environment which is suppressing running
investment yields. In particular, Moody's believes
that ERGO's performance, especially in its life business,
is currently some way below the Group's 15% RORAC target.
ERGO's life business produced an IFRS profit at year-end
2011, albeit a modest one, but most striking were negative
earnings of around EUR2.6 billion for German life on a Market Consistent
Embedded Value (MCEV) basis. Whilst recognising that Munich Re
does not apply interest surcharges such as illiquidity premiums in its
MCEV calculation, its German life business is meaningfully exposed
to spread deficiency risk as a result of its guaranteed products.
Another challenge for the Group is the inherent volatility of its'
catastrophe exposed business. The Group's average return
on capital (ROC) from 2007-2011 of around 7.5% and
its relatively low sharpe ratio of 197% were negatively impacted
by the low ROC and RORAC of 2.4% and 3.2%
respectively in 2011, a year heavily impacted by Nat Cat losses
as reflected in the reinsurance combined ratio of 113.6%.
However, we believe that the Group, like its peers,
should benefit from improved P&C reinsurance pricing during 2012,
and we note the significantly improved result at H1 12, compared
to H1 11, with a reported RORAC of 13.1% benefiting
from materially less major loss claims.
The affirmation of the Aa3 insurance financial strength ratings on ERGO
Lebensversicherung AG, (formally Hamburg-Mannheimer Versicherungs
AG) and Victoria Lebensversicherung AG reflect their importance within
ERGO Versicherungsgruppe (ERGO), the primary insurance operations
of the Munich Re Group, and some benefit of parental support that
Moody's considers to be available for these operations. The
ratings also reflect ERGO's position as the third largest life insurance
company in Germany, its well-diversified business profile
and its extensive distribution network. In addition, risk
mitigation through a swaption program has reduced exposure to persistently
low interest rates. However, ERGO lost market share in recent
years, and although the market position in the last 3 years has
stabilised, achieving profitable growth is likely to be one of the
main challenges in the near term where the prolonged low interest rate
environment is likely to continue to exert pressure on earnings.
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 (MRAC), reflecting
strong explicit and implicit support from Munich Re and the strategic
importance of the US operations to the overall Group. MRAC is well
diversified across products and distribution channels, and has developed
strong relationships with many clients through direct distribution.
These strengths are tempered by soft pricing in casualty lines in more
recent accident years, by persistent competition from other global
reinsurers, and by the inherent volatility of various reinsurance
business lines. During 2011, MRAC reported GAAP net income
of $794 million.
The rating agency noted the following factors could put upward pressure
on Munich Re's ratings: sustained strong core earnings with
return on capital of 12-14% 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 capital
over the underwriting cycle below 7%, financial leverage
consistently above 25% and earnings coverage consistently below
6x, reduction in shareholders' equity of >10% over a 12
month period due to catastrophe losses or poor operating results,
significant deterioration in asset quality
The following ratings were affirmed with a stable outlook:
Munich Reinsurance Company - Aa3 insurance financial strength rating,
A2 (hyb) subordinated debt rating, A3 (hyb) junior subordinated
debt rating
Munich Reinsurance America, Inc.- Aa3 insurance financial
strength rating
Munich Re America Corporation- A2 senior debt rating
ERGO Lebensversicherung AG -- Aa3 insurance financial strength
rating;
Victoria Lebensversicherung AG -- Aa3 insurance financial
strength rating;
The principal methodology used in these ratings was Moody's Global Rating
Methodology for Reinsurers published in December 2011. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
Based in Munich, Germany, Munich Re reported gross premiums
written of Eur49.6 billion, equity of Eur23.3 billion,
and net income of Eur702 million as at YE11.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
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uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
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information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
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the lead rating analyst and to the Moody's legal entity that has
issued the rating.
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Simon Harris
MD - Financial Institutions
Financial Institutions Group
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SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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Moody's Affirms Munich Re's Aa3 IFSR With a Stable Outlook
