Munich Re Plans 3.8 Billion Euros Offering

By Lisa S. Howard, International Editor

NU Online News Service, Oct. 17, 1:25 p.m. EDT,London?With its ratings under pressure, Munich ReinsuranceCompany has decided to raise at least 3.8 euros (4.4 billion) inadditional equity capital through a share offering in this year'sfourth quarter.

Existing shareholders under the rights offering are given thefirst right to subscribe to the issue in proportion to theirholdings. Any part of the issue not taken by existing holders wouldbe offered to the general public at a subscription price of atleast 75 euros ($87) per share, the company said.

The reinsurer said it intends to make use of the strongercapital base to expand its leading market position, especially inthe reinsurance area, by taking selective advantage of profitablegrowth opportunities.

Munich Re said the market environment for reinsurance isparticularly favorable "because of the high demand for riskassumption and the reduced supply of capacity, the outcome beingbetter premiums and conditions."

"What our clients are looking for are not only competence andquality but also security and solidity," said Hans-JurgenSchinzler, chairman of the board of management of MunichReinsurance Company, in a statement. "A broader capital base willenable us to take advantage of additional earnings opportunitiesand to finance selective growth in promising markets."

Standard & Poor's Ratings Services, which downgraded MunichRe to "A-plus" from "double-A-minus," said the rights issue "willsignificantly improve the quantity and quality of Munich Re'scapital when completed."

In addition, Moody's Investors Service in London affirmed thefinancial strength ratings of Munich Re at "Aa3," although theoutlook remains negative. Moody's also affirmed the ratings ofAmerican Re at "A2," Hamburg-Mannheimer Versicherungs-AG at "Aa3"and Victoria Lebensversicherung AG at "Aa3."

But, Commerzbank Securities in London had a negative reactionstating that even 3.8 billion euros is not enough additionalcapital without a reduction in Munich Re's equity holdings.

Munich Re needs new equity of 4 billion to 4.5 billion euros($4.6 billion-$5.2 billion) to justify a "double-A" rating,Commerzbank said, confirming, however, that the capital increase"represents a welcome recognition of reality by the firm?"

"Munich Re's balance sheet problems relate to a combination ofinadequate capital and excess equity investment (insurers needcapital to support the volatility of holding equities," CommerzbankSecurities said.

"The capital raising underlines the very strong financialflexibility enjoyed by the group and supports Munich Re's long-termstrategy," said Stephen Searby, credit analyst with S&P, inLondon. "It is also consistent with [S&P's] expectation thatthe group's capital adequacy ratio will be improved to the[double-A] range by the end of 2004," he added in a statement.

In addition to the proposed offering, "Munich Re'scapitalization should continue to benefit from existing andproposed initiatives to reduce risk on the group's balance sheet,"S&P said.

The ratings on the operating entities of the group, S&Psaid, "will be primarily driven by the extent to which Munich Recan sustain the improved operating performance seen in the firsthalf of 2003, both relative to its historical results and relativeto the industry."

S&P noted that for the first half of 2003, Munich Re'scombined ratio was 95.9, compared with 133.1 for the same periodlast year. S&P "expects this improvement to be reflected in thefull-year underwriting results, but that continued investmentimpairments and proposed changes to the German tax regime willaffect reported retained profits," the ratings agency said.

Moody's said the rating affirmation reflects the agency's viewthat "the prospective capital-raising exercise will be an importantstep in rebuilding Munich Re's capital base, which has beensignificantly weakened since the year 2000 due to operating losses,capital markets effects and reserve strengthening."

With a stronger capital base, the company will be able "to takeadvantage of continued strong underwriting conditions in its corereinsurance business," Moody's said.

Offsetting the positive aspects of the rights issue, Moody'snoted that Munich Re's capital situation is still negativelyaffected by "the volatility of its equity base related to changesin securities values, given the elevated levels and theconcentration of shares relative to its capital base?over 100percent before the impact of hedges and without the inclusion ofthe proceeds of the forthcoming rights issue."

Munich Re said the subscription period for the issue is plannedfor Oct. 28 to Nov. 10, when Munich Re shareholders can subscribefor two new Munich Re shares for every seven old shares held. Thetotal of 50,912,946 new shares will be entitled to a dividendretroactively from Jan. 1, and therefore for the whole of 2003, thecompany said.