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Announcement:

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

09 Dec 2010

London, 09 December 2010 -- 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. These strengths are offset somewhat by the challenge of achieving its 15% cross-cycle return on risk adjusted capital (RORAC) target within a low interest rate environment, 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 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 is also one of the two leading global life reinsurers, albeit with a relatively small presence in the US market-place. 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 Versicherungsgruppe (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 (38% of reinsurance GPW at YE2009), although this business is not without risk, and has meaningful primary insurance operations, accounting for around 42% of total GPW, albeit orientated towards life and health and German business (respectively c.71% 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 remain below 10%. In particular, Moody's notes the Group's continued low equities exposure (only 2.6% net of hedging at Q1 10), 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. The Group's sovereign debt is orientated towards North America, Germany, UK, and France. Exposure to Greek, Irish, and Portuguese bonds, including policyholder participation, is limited to around 5% of the overall government/semi-government bond portfolio.

Capital adequacy is viewed as strong with Munich Re's YE09 economic risk capital coverage, based on the requirements of its internal risk model (175% of VaR 99.5%) improving to 153% (post dividend payment and share buy-backs) compared to 142% at YE08. Moody's also notes the considerable risk mitigation undertaken by ERGO. Nevertheless, the gross underwriting leverage metric for the reinsurance business is somewhat high at 3.1x, although the Group's gross and net natural catastrophe exposures remain within Moody's Aa parameters. Furthermore, Moody's capitalisation metrics for the Group remain inferior to those achieved before the financial crisis as does the Group's economic risk capital coverage which stood at 199% in 2007. Moody's also notes that meaningful share buy-backs and dividends have been a consistent feature of Munich Re's capital management with €10.5bn returned to shareholders from 2005-9m 2010, but this has been outweighed by net income of around €16bn in the same period.

Off-setting these strengths somewhat is the inherent volatility of the Group's catastrophe exposed business, as demonstrated by the P&C reinsurance combined ratio of 102% at 9m 2010, and the challenge for the Group of achieving its 15% cross-cycle return on risk adjusted capital (RORAC) target within a low interest rate environment. Furthermore, we believe that compensating for lower investment yield through improved underwriting results will be difficult in light of the pricing headwinds that Munich Re and other reinsurers currently face as a result of the ample capacity in the reinsurance industry. This is notwithstanding that the Group's P&C reinsurance combined ratio for 2006-9m 2010 is in line with its 97% cross-cycle target, and the recent improvement in the attritional loss ratio. We also recognize that Munich Re's ROE from 2005-2009 has averaged around a very good 12% with low volatility, and the Group has achieved RORACs of 15% and 14.5% for 2009 and 9m 2010 respectively. Overall we view Munich Re's profitability as very good as opposed to excellent.

The affirmation of the Aa3 insurance financial strength ratings on ERGO Lebensversicherung AG, (formally Hamburg-Mannheimer Versicherungs AG) and Victoria Lebensversicherung AG reflect their status as core members of ERGO Versicherungsgruppe (ERGO), the key direct insurance operations of the Munich Re group. The ratings also reflect ERGO's strong position as respectively the third and fifth largest Life and P&C player in Germany, its well-diversified product offering and its extensive distribution network. Partially offsetting these strengths, ERGO has been losing market share in recent years, although intentionally for traditional business, and the prolonged low interest rate environment is likely to continue to exert pressure on earnings. In addition there will inevitably be challenges, for example potentially higher lapse ratios at Victoria, associated with the decision to discontinue new business activity at Victoria and adapting to the new ERGO corporate structure.

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 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, as well as an increasing presence in the broker market channel. For the nine months ended September 30, 2010, MRAC reported GAAP net income of $165 million and a combined ratio of 98.2%.

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

ERGO Lebensversicherung 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 Eur41.4 bn, equity of Eur22.3bn, and net income of Eur2.5bn as at YE09.

The date of the previous rating action was 2 July 2009 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, published in July 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

London
Simon Harris
MD - Financial Institutions
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 Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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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