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Rating Action:

Moody's affirms Munich Re's IFS rating at Aa3 (A2(hyb) for subordinated debt); outlook stable

24 Nov 2016

London, 24 November 2016 -- Moody's Investors Service, ("Moody's") has affirmed the Aa3 insurance financial strength (IFS) ratings of Munich Reinsurance Company (Munich Re) and Munich Reinsurance America, Inc., along with their associated debt ratings. The outlook is stable.

A list of all ratings affected by this rating action is available at the end of this press release.

Munich Re is the largest global reinsurance group by gross premiums written. It reported gross premiums written of EUR50.4 billion in 2015 and shareholders' equity of EUR31.0 billion as of 31 December 2015.

RATINGS RATIONALE

MUNICH RE

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 relatively conservative investment portfolio, together with conservative management practices. These strengths are somewhat offset by the pressure on profitability due to the challenging reinsurance pricing trends along with the persistently low interest rate environment, the inherent volatility of the group's catastrophe exposed business, and costs and execution risk associated with the restructuring of its ERGO primary insurance business.

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 excellent franchise serves the group well as it navigates the current soft reinsurance cycle by enabling the group to access risk pools that are not always accessible to mid-market reinsurers, generally via large structured transactions which benefit from differentiated terms and pricing.

The group is very well diversified by geography as well as business line, with leading positions in life and health (re)insurance, as well as in property and casualty (P&C) reinsurance. The P&C reinsurance business, which is well diversified across property, casualty and specialty lines, is the largest contributor to the group's premiums (35% of 2015 gross written premiums), followed by ERGO (33%), Life reinsurance (21%) and Munich Health (11%). 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. In terms of geographic diversification, the group's 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.

Moody's considers Munich Re's profitability to be solid with an average return on capital of 7.0% over the past five years through 2015, 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 - over the past four years, return on capital has declined from 8.7% in 2012 to 7.5% in 2015, largely driven by deterioration in underwriting profitability, but also lower investment income. In addition, weaker performance by ERGO, along with its restructuring and strategic repositioning are expected to dampen group profitability over the medium term. Earlier this year, the group announced a significant restructuring initiative at ERGO, that seeks to position it as a more efficient and modern international insurer. The restructuring is expected to cost approximately EUR1 billion until 2020, after which the group expects ERGO to be in a position to contribute approximately EUR500 million to annual net profit. While we expect ERGO's profitability will improve over the medium term, as a result of the restructuring, meaningful execution risk exists, particularly in the significant technology overhaul that will form the backbone of the restructuring efforts.

Capital adequacy is strong, with solid levels of regulatory and economic capital, and moderate modelled nat-cat exposures compared to its reinsurance peers. While regulatory capital, as measured by the group's Solvency II ratio, is robust at a level of between 250% to 260% at H1 2016 (302% at year-end 2015), it has been somewhat volatile, in part due to the group's significant interest rate exposure in its ERGO primary life insurance business. The group also 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 CORPORATION

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 exposure to continued price competition in the reinsurance markets, the inherent volatility of various reinsurance business including catastrophe business.

MRAC benefits from various forms of group support, including a loss portfolio transfer (LPT) agreement and adverse development cover (ADC) covering losses from accident years 2001 and prior, stop loss covers for accident years 2002-2008, a variable quota share program covering most new business written prior to 2006, and 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 as of year-end 2015.

WHAT COULD CHANGE THE RATINGS

Downward pressure on Munich Re's ratings could result from: (i) a decrease in the group's return on capital to below 6% over the underwriting cycle, or a sharp increase in volatility of returns, (ii) financial leverage consistently above 25% and earnings coverage consistently below 6x, (iii) material deterioration in the group's risk profile, for example following rapid growth in volatile or risky businesses, (iv) meaningful and sustained adverse reserve development, or (v) a reduction in shareholders' equity of more than 10% over a 12 month period due to catastrophe losses or poor operating results.

Upward pressure on Munich Re's ratings could result from: (i) sustained strong core earnings with return on capital above 12% over the underwriting cycle, (ii) financial and total leverage consistently below 20%, with earnings coverage over 10x through the cycle, and (iii) material improvement in the business environment, including P&C reinsurance pricing and interest rates.

Upward or downward pressure on Munich Re America's ratings would follow that of its parent, Munich Re.

LIST OF AFFECTED RATINGS:

Moody's affirmed the following ratings:

Issuer: Munich Reinsurance Company

Insurance Financial Strength, at Aa3

Subordinated debt, at A2(hyb)

Junior Subordinated debt, at A3(hyb)

Issuer: Munich Re America Corporation

Senior Unsecured debt, at A2

Issuer: Munich Reinsurance America, Inc.

Insurance Financial Strength, at Aa3

The outlook for all issuers is stable.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Reinsurers published in April 2016. 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 person who approved Munich Reinsurance Company credit ratings is Antonello Aquino, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454. The person who approved Munich Reinsurance America, Inc. and Munich Re America Corporation credit ratings is Marc Pinto, MD - Financial Institutions, Financial Institutions Group, JOURNALISTS: 212-553-0376, SUBSCRIBERS: 212-553-1653.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the Website.

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.

Brandan Holmes
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

Antonello Aquino
Associate Managing Director
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

No Related Data.
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