Moody's Downgrades Munich Re

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NU Online News Service, April 4, 3:30 p.m.EST?Moody's Investors Service announced today that it hasdowngraded its rating for the world's largest reinsurer, MunichRe.

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New York-based Moody's said the rating action involves loweringfinancial strength ratings to "Aa3" from "Aa1" for MunichReinsurance Company, as well as the group's Hamburg-MannheimerVersicherungs AG and Victoria Lebensversicherung AG.

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Additionally, the ratings agency also cut financial strengthrating of the Munich-based reinsurer's U.S. unit, AmericanRe-Insurance Company, to "A2" from "Aa2," and its senior debt to"A3" from "Aa3." All the ratings, Moody's noted, carry a negativeoutlook.

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One of the main reasons for these downgrades is the sharpdecline in Munich Re's capitalization, which continues to exertpressure on the group's capital base this year, Moody's stated.

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Moody's said the drop in capitalization is primarily caused bythe reduced value of Munich Re's cross shareholdings, mostly inAllianz AG and HVB Group, both headquartered in Munich,Germany.

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The ratings agency also warned that it expects Munich Re'searnings to be hurt this year by modest investment returns, andthat the reinsurer's announced goal of 104 percent combined ratioover the cycle remains challenging.

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Furthermore, Moody's also argued that the company's equityexposure, while reduced, still remains high.

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"These factors, coupled with prospects for restrained earningsduring 2003, present a significant challenge to rebuild the capitalbase to historic levels in the short-to-medium term," the ratingsagency said.

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Regarding the group's U.S. unit, American Re, Moody's cited itscapital position and also asbestos exposures--and said theseconcerns are heightened by Munich Re's reduced ability to supportAmerican Re and its subsidiaries.

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Moody's also expressed its concern that in 2002, American Re hadseen a jump in reported asbestos losses, compared to the previousyear.

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Given recent asbestos reserve charges taken by primary insurers,"Moody's believes there is a possibility that American Re will needto strengthen asbestos reserves over the next few years," therating agency observed.

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