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I AGREE
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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