London, 06 December 2018 -- Moody's Investors Service ("Moody's") has today
affirmed the Aa3 insurance financial strength (IFS) ratings of Munich
Reinsurance Company (Munich Re) and Munich Reinsurance America,
Inc., along with the group's associated debt ratings.
The outlook remains stable.
A list of all ratings affected by this rating action is available at the
end of this press release.
RATINGS RATIONALE
The rating affirmation reflects Munich Re's excellent business franchise
and very strong market position in global reinsurance, its broad
diversification across geographies and business lines, strong capital
adequacy and moderate asset risk, together with relatively conservative
reserving practices. These strengths are partially offset by pressure
on profitability due to challenging reinsurance pricing trends,
along with the low interest rate environment, and the inherent volatility
of the group's catastrophe exposed business. In addition,
while the group has made very good progress in repositioning ERGO,
there is still some uncertainty and execution risk associated with the
ongoing restructuring of that business, which commenced in 2016.
As the largest global reinsurer, Munich Re benefits from its extensive
geographic and product diversification and leading reputation for technical
expertise and customer service. This franchise strength serves
the group well as it navigates the current soft reinsurance cycle by enabling
Munich Re to access business that is not always accessible to mid-market
reinsurers, generally via large structured transactions which benefit
from differentiated terms and/or pricing. Munich Re is at the forefront
of innovation and product development, as for example shown by its
leading position in cyber insurance, where the group holds a 10%
share of this still nascent market, which carries both opportunities
and risks.
The group is very well diversified by geography and business line,
with leading positions in life and health (re)insurance, as well
as in property and casualty (P&C) reinsurance which represented 36%
of 2017 gross written premiums, followed by ERGO at 36%,
and Life and Health reinsurance at 28%. ERGO is the group's
primary insurance operation, which offers life, health and
P&C insurance, predominately in Germany, with smaller
operations in a number of other countries.
The group's gross written premiums are spread across North America (33%),
Europe (52%) and Asia. Latin America and the rest of the
world (15%). Strong diversification amongst less correlated
business lines and geographic regions provides some protection against
cyclical effects, including the P&C (re)insurance pricing cycle.
This was highlighted during 2017, when the group remained profitable
despite incurring heavy natural catastrophe losses during the highest
insured-loss year on record, as well an active catastrophe
year thus far in 2018.
Moody's considers Munich Re's profitability to be solid with an average
return on capital of 6.2% over the past five years through
2017, although it has been volatile at times given its meaningful
cat-exposed property portfolio. Despite the group's excellent
franchise, it has not been fully insulated from the impact of softening
reinsurance prices, with the group's reported return on equity
declining to 9.9% (annualized) for the first nine months
of 2018 and 1.3% for 2017, from 12.5%
for 2013, largely driven by deterioration in underwriting profitability
and lower investment income. That said, improving profitability
at ERGO, which reported profits EUR359 million for the first nine
months of 2018 (9M2017: EUR224 million), is becoming a more
important component of overall group profitability. The group's
profitability targets include net income of EUR 2.8 billion by
2020, including EUR 500 million contributed by ERGO.
Capital adequacy is strong, with solid levels of regulatory and
economic capital, and moderate modelled natural catastrophe exposures
compared to its reinsurance peers. While regulatory capital,
as measured by the group's Solvency II ratio, is robust at a level
of approximately 260% as at Q3 2018 (244% as at year-end
2017), it is somewhat sensitive to movements in financial markets
and interest rates, in part due to the group's significant asset
exposure in its ERGO primary life insurance business. For example,
as at year-end 2017, the group's Solvency II coverage
ratio shows significant sensitivity (decrease by 27% points) in
the event of a 100bps widening in government credit spreads or (decrease
by 19% points) in the event of a 50bps decrease in interest rates.
This in part reflects the group's significant asset exposure in its ERGO
primary life insurance business and also the group's decision not
to use the volatility adjustment mechanism. The group benefits
from a very high quality capital base, with approximately 90%
of its eligible own funds being classified as Tier 1 capital.
MUNICH RE AMERICA
Moody's A2 senior unsecured debt rating on Munich Re America Corporation
(MRAC) and the Aa3 IFS rating on MRAC's principal operating subsidiary
reflect their strategic importance to Munich Re, strong implicit
and explicit support from Munich Re, strong franchise in the direct
and broker reinsurance market, well diversified product lines,
and a high quality investment portfolio. These strengths are somewhat
tempered by the company's earnings volatility from property catastrophe
reinsurance exposures as well as the cyclical nature and price competitiveness
of the reinsurance industry.
MRAC benefits from various forms of group support, including a loss
portfolio transfer agreement, an adverse development cover stop
loss agreements as well as excess of loss agreements covering catastrophe
risks and certain other exposures. US P&C operations (including
HSB and AMIG) accounted for about 34% of Munich Re's consolidated
gross non-life reinsurance premiums written in 2017.
MRAC benefits from various forms of group support, including a loss
portfolio transfer agreement, an adverse development cover stop
loss agreements as well as excess of loss agreements covering catastrophe
risks and certain other exposures. MRAC accounted for about 34%
of Munich Re's consolidated gross non-life reinsurance premiums
written in 2017.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's said that the ratings could be upgraded in case of: (i)
sustained strong core earnings with adjusted return on capital above 10%
over the underwriting cycle, while maintaining low volatility in
profitability, and/or (ii) financial and total leverage consistently
below 20%, together with earnings coverage over 10x through
the cycle, and/or (iii) material improvement in the business environment,
including P&C reinsurance pricing and interest rates.
Moody's said that Munich Re's ratings could be downgraded in case of (i)
return on capital of below 6% over the underwriting cycle,
or a sharp increase in volatility of the returns, and/or (ii) financial
leverage consistently above 25% and earnings coverage consistently
below 6x, and/or (iii) material deterioration in the group's
risk profile, for example following rapid growth in volatile or
risky business, and/or (iv) meaningful and sustained adverse reserve
development, and/or (v) reduction in shareholders' equity of more
than 10% over a 12 month period due to catastrophe losses or poor
operating results.
Munich Re is the largest global reinsurance group by gross premiums written.
It reported gross premiums written of €49 billion in 2017 and shareholders'
equity of €27 billion as of 30 September 2018.
The following ratings have been affirmed:
Issuer: Munich Reinsurance Company
Insurance Financial Strength (IFS) rating, affirmed at
Aa3
Subordinated debt rating, affirmed at A2(hyb)
..Outlook Action:
The outlook remains stable
Issuer: Munich Reinsurance America Inc.
Insurance Financial Strength (IFS) rating, affirmed at
Aa3
..Outlook Action:
The outlook remains stable
Issuer: Munich Re America Corporation
Senior unsecured debt rating, affirmed at A2
..Outlook Action:
The outlook remains stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Reinsurers published
in May 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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 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 rating analyst and the Moody's legal entity that has issued
the ratings.
The person who approved Munich Reinsurance Company credit ratings is Antonello
Aquino, Associate Managing Director, Financial Institutions
Group, New York +1-212-553-0376,
London +44-20-7772-5456. The person who
approved Munich Reinsurance America, Inc. and Munich Re America
Corporation credit ratings is Sarah Hibler, Associate Managing Director,
Financial Institutions Group, New York +1-212-553-0376,
London +44-20-7772-5456.
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.
Brandan Holmes
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
