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Rating Action:

Moody's Affirms Munich Re's Ratings (A2(hyb) Subordinated Debt, Aa3 IFSR); Stable Outlook

19 Nov 2014

London, 19 November 2014 -- Moody's Investors Service has today affirmed with a stable outlook the Aa3 insurance financial strength rating (IFSR) and debt ratings of Munich Reinsurance Company (Munich Re) and associated subsidiaries (see list below for more details). As part of the same rating action, Moody has also affirmed the rating of Munich Re's Brazilian operation, Munich Re do Brasil Resseguradora S.A., with a continued negative outlook, reflecting the sovereign rating outlook of Brazil.

The rating affirmation reflects Munich Re's excellent business franchise, strong business diversification, capital adequacy and asset quality, together with Munich Re's generally 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 and the inherent volatility of its catastrophe-exposed business. Furthermore, whilst Munich Re is the largest global reinsurer by premium volume, pricing conditions within Munich's core reinsurance business are, and are expected to remain, distinctly challenging over the next 12-18 months.

RATINGS RATIONALE

- MUNICH RE

Munich Re is one of the leading global reinsurers and Moody's continues to view its reinsurance market position as excellent. Munich Re has a significant market share in property and casualty (P&C) reinsurance, and the group writes around half of its business directly, frequently being the lead reinsurer on programmes. Munich Re was also the leading global life reinsurer by premium volume in 2013, albeit with a relatively small presence in the US market-place. Via ERGO Versicherungsgruppe AG (ERGO), the Group is also Germany's third largest primary insurer with a market share of around 7% and a leading position in the domestic health segment.

The group also benefits from strong business and geographic diversification, with significant amounts of generally non-correlating and less volatile life & health reinsurance business (48% of reinsurance gross premium written (GPW) at YE13 and 30% of total GPW), as well as meaningful primary insurance operations, accounting for around 36% of total GPW, albeit orientated towards life and health (70% of total primary business) and Germany (77% of 2013 premiums sourced from Germany).

Although Moody's views primary insurance as bringing positive product risk diversification, earnings diversification is relatively muted, with 70% of 2013 consolidated Munich Re profits coming from P&C reinsurance. ERGO also brings significant interest rate risk, which the group continues to mitigate via increasing asset duration, swaptions, and opposite interest-rate sensitivities in primary and reinsurance mitigate sensitivity at the group level.

Capital adequacy is viewed as strong. Munich Re's YE13 economic risk capital coverage, based on the requirements of its internal risk model (175% of VaR 99.5%) remained above the Group's 100-120% target range at 153%. This equates to a Solvency II coverage of 267% as at YE13, positioning it strongly in the European (re)insurance industry.

Off-setting these strengths somewhat is the challenge for the Group of achieving its 15% RORAC target within a low interest rate environment and with P&C reinsurance rates remaining under pressure, particularly on the non-proportional side. Furthermore, Moody's believes that ERGO's performance, especially in its life business, is currently some way below the Group's 15% RORAC target. Another challenge is volatility of profitability partly induced by the Group's catastrophe exposed business.

- ERGO VERSICHERUNGSGRUPPE

The affirmation of the Aa3 IFSR on ERGO Lebensversicherung AG and Victoria Lebensversicherung AG reflect their importance within ERGO Versicherungsgruppe AG (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 insurance group in Germany, its well-diversified business profile and its extensive distribution network. The ratings are also underpinned by good risk management practices, as evidenced by the use of an interest rates swaption program, which reduces pressure from persistently low interest rates on capital. Nonetheless, Moody's mentions low interest rates and a recent reform of the German life sector are likely to exert near-term pressure on ERGO's sales and earnings even if, longer term, Moody's expects that the reform will have a positive impact on the group's credit-risk profile.

- MUNICH REINSURANCE AMERICA

Moody's has also affirmed the Aa3 IFSR of Munich Reinsurance America, Inc. 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 the weak reinsurance pricing outlook, persistent competition from other global reinsurers and the inherent volatility of various reinsurance business lines. For the first nine months of 2014, MRAC reported GAAP net income of $502 million.

- MUNICH RE DO BRASIL

Regarding the affirmation of Munich Re do Brasil Resseguradora S.A.'s A3 IFSR and Aaa.br IFSR on the national scale, these primarily reflect the implicit (through the brand sharing and integration) and explicit (through extensive intercompany reinsurance arrangements and capital injections) support it receives from its ultimate parent company -- Munich Reinsurance Company. The continued negative outlook on Munich Re do Brasil mirrors the negative outlook on Moody's sovereign rating for Brazil, due to the close linkages between the creditworthiness of the company and that of the sovereign.

- RATIONALE FOR STABLE OUTLOOK

The stable outlook on the group's main ratings reflects; (1) the very strong franchise of Munich Re, which we believe will help mitigate the pricing and profitability pressures Munich Re faces within its core reinsurance business, and (2) our expectation that the generally conservative management practices of Munich Re will continue for the foreseeable future.

WHAT COULD MOVE THE RATINGS UP/DOWN

The rating agency noted the following factors could put upward pressure on Munich Re's ratings; (1) sustained strong core earnings with return on capital of 12-14% over the underwriting cycle, (2) financial leverage consistently in the mid- to high teens (15-19%), and (3) earnings coverage of 9-14x.

Conversely, the following factors could put negative pressure on the ratings; (1) return on capital over the underwriting cycle below 6%, (2) financial leverage consistently above 25%, (3) earnings coverage consistently below 6x, (4) a reduction in shareholders' equity of >10% over a 12 month period due to catastrophe losses or poor operating results, and/or (5) significant further pressures on reinsurance pricing levels.

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 following ratings were affirmed with a negative outlook:

Munich Re do Brasil Resseguradora S.A. - A3 insurance financial strength rating, Aaa.br NSR insurance financial strength rating

Based in Munich, Germany, Munich Re reported gross premiums written of EUR 51.1 billion, shareholders' equity of EUR 26.2 billion, and net income of EUR 3,313 million as at YE13.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Reinsurers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The person who approved Munich Reinsurance Company, ERGO Lebensversicherung AG and Victoria Lebensversicherung AG is Simon Harris, Managing Director, Insurance, JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

The person who approved Munich Re do Brasil Resseguradora S.A.is Robert Riegel, Managing Director, Insurance, JOURNALISTS: 212 553 0376 SUBSCRIBERS: 212 553 1653

The person who approved Munich Reinsurance America, Inc. and Munich Re America Corporation is Stanislas Rouyer, Associate Managing Director, Insurance, JOURNALISTS: 212 553 0376 SUBSCRIBERS: 212 553 1653

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Masters
Vice President - Senior Analyst
Financial Institutions Group
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

Simon Harris
MD-Gbl Ins and Mgd Invests
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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 Ratings (A2(hyb) Subordinated Debt, Aa3 IFSR); Stable Outlook
No Related Data.
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