Reinsurance Firms Ratings Drift LowerInternational Editor

London

The turmoil in the European insurance and reinsurance markets isleading to more rating agency downgrades, blamed principally onreduced capitalization, weak earnings and, in one case, problems ofreinsurance recoverables.

One of the more recent casualties was the once indomitableAllianz AG, which announced a 2002 loss of 1.2 billion euros ($1.3billion at current exchange rates) and a plan to raise 5 billioneuros ($5.3 billion) in the capital markets. As a result, A.M. Bestlowered Allianz financial strength rating to “A+” from “A++,” whileStandard & Poors Ratings Services lowered its long-term insurerfinancial strength ratings to “AA-” from “AA.”

The rating action “reflects Allianzs deteriorated consolidatedcapitalization and weak earnings,” said the Oldwick, N.J.-basedA.M. Best.

“Allianzs operating performance, although historically verystrong, has deteriorated significantly over the past two years,”said Wolfgang Rief, credit analyst in S&Ps Frankfort, Germanyoffice.

The 2002 loss of 1.2 billion euros was “weighed down byoperating losses at Dresdner Bank AG of 2.0 billion euros ($2.1billion); significant reserve strengthening at the U.S.-basedFiremans Fund group of 762 million euros ($814.4 million); claimsfrom floods in Central Europe amounting to 710 million euros($758.8 million); and poor earnings in its industrial riskdivision, Allianz Global Risks, and at is France-basedproperty-casualty operation, AGF,” S&P said in a statement.

A.M. Best said that Allianz continues to have “a superiorbusiness profile, but it remains challenged to significantlyimprove earnings in 2003, mainly due to continued depressed capitalmarkets.”

Moodys Investors Service affirmed the current ratings ofAllianzs various subsidiaries (which range from “A1″ to “Aa2″ to“Aa3,” depending on the entity.)

A Moodys agency London office statement said capitalization ofthe group, although relatively strong, had weakened through theyear. “Allianzs shareholder equity has fallen substantially through2002–from 31.7 billion euros ($33.9 billion) to 21.8 billion euros($23.3 billion)–largely as a result of reduced levels of unrealizedasset gains, coupled with the loss for the year.”

Allianz capital raising will “substantially improve” itscapitalization position, but if it is unsuccessful, negative ratingactions would likely arise, said Moodys.

Hannover Re suffered a downgrade–Moodys lowered the financialstrength ratings of the reinsurer and its subsidiary E+SRuckversicherungs to “Baa1″ from “A2.” ( Moodys rating is basedsolely on publicly available information.)

In part, Moodys said the rating action reflects Hannover Reshigh levels of “reinsurance recoverables, which stood at 6.3billion euros ($6.7 billion) as of Sept. 30, 2002.”

Hannover Re retorted that its reinsurance recoverables are nosignificant risk for the company. Reinsurance recoverables arecarefully analyzed with 89 percent of the recoverables due fromcompanies rated by S&P with “A” or higher.

Moodys view “reflects their negative stance towards the entireinsurance industry,” Hannover Re said, adding that the rating“diverges significantly” from other leading rating agencies.

Hannover Re noted Moodys rating is based on publicly availableinformation, unlike those of S&P and A.M. Best, which haveawarded the company “AA” and “A+”, respectively.

Christopher Hitchings, analyst with Commerzbank Securities inLondon, said Hannover Res balance sheet cant be judged “by theperformance of net assets over the last two years relative to itspeers. Clearly, there is a degree of security there, which is notbeing captured by [Moodys] determinations.”

On March 12, Paris-based reinsurer Scor saw Moodys downgrade itsScor's insurance financial strength rating to “Baa2″ from “Baa1.”SCORs downgrade reflects Moodys opinion that SCOR faces challengesimplementing its 2002 Back on Track plan “including thestrengthening of its risk management, internal controls,underwriting and corporate governance.”

On March 3, Scor said its 2003 renewals “fully satisfy therequirements of selectivity and profitability set in its Back onTrack plan.” Scor has an “A-” financial strength rating with A.M.Best and S&P, and a “BBB” financial strength rating with Fitch,all of which are comprehensive ratings unlike Moodys.

In a separate rating action, Moodys announced last week that itplaced the “Aa1″ financial strength ratings of Munich Re and itssubsidiaries Hamburg-Mannheimer Versicherungs and VictoriaLebensversicherung on review for possible downgrade. The Aa2 ratingof American Re-Insurance Corp. is also under review. Moodys said ithad concerns regarding the uncertainties in Munich Rescapitalization.

Reproduced from National Underwriter Edition, March 31, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.