S&P Downgrades Munich Re

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Standard & Poors, in the latest bleak assessment to hit astring of reinsurers, downgraded Munich Re to “A-plus” from “doubleA-minus.”

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The S&P downgrade, last week, followed Munich Reshalf-yearly results, when the company reported an after-tax loss of603 million euros ($656.1 million) due to a one-off tax charge of1.4 billion euros ($1.5 billion).

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Over the past year a number of rating agencies have loweredtheir evaluations of many of the giants of the reinsuranceindustry, including Paris-based SCOR and Zurich, Switzerlands SwissRe.

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But, Munich Re said the S&P downgrade was “unjustified” andthe reasons given for the measure were “unconvincing.”

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The company pointed to the fact that the groups equity fundsincreased in the second quarter by around 50 percent to over 18billion euros ($19.6 billion). Further, Munich Re said, thefinancial strength of the group has improved, evidenced by areinsurance combined ratio of 95.9 and an insurance combined ratioof 96.

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The downgrade reflects “a re-evaluation by Standard & Poorsof reinsurance industry risk and of Munich Res position within thatindustry following the historic relative underperformance in itsnon-life underwriting profitability,” said S&P credit analystNigel Bond in a statement.

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“The action also reflects the slower-than-expected recovery inMunich Res earnings and the impact this could have on the groupsability to replenish capital during the current hard phase of thecycle,” said S&P. “Nevertheless, the ratings remain underpinnedby Munich Res very strong business position.”

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Despite its pessimistic view of the industry and Munich Resfortunes, S&P said it expects operating results “to reboundsignificantly for the year ending Dec. 31, 2003, as the impact ofprice increases and tighter terms and conditions continues to takeeffect.”

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Consequently, S&P said the outlook for Munich Re is stable,which it based on an expectation that Munich Re “will improveearnings, rebuild capital and maintain its very strong businessposition in both the non-life and life reinsurance markets.”

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“Munich Re could either accept the downgrade or raise somecapital to stop it, and they decided to accept the downgrade andnot raise capital, which I thought was the less likely option,”said Christopher Hitchings, European insurance analyst withCommerzbank Securities in London.

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A Munich Re representative said the company will not raisecapital just “to satisfy a rating company.”

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“Of course, as a professional reinsurer we are examining alloptions we have, but if and when we do any kind of capitalmeasures, [it will be a path] we will decide after weighing all thepros and cons and what implications this will have for all ourstakeholders, but not just because a rating agency brings pressureon us,” the representative said.

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In its half-yearly figures, Munich Re reported the loss of 603million euros ($656.1 million), compared to a profit of 4.1 billioneuros ($4.5 billion) for the first half last year. (The 2002 resultfor the half was boosted as a result of the sale of some of theholdings in Allianz.)

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Pre-tax operating results for the half came to 777 million euros(845.5 million), compared with 3.5 billion euros ($3.8 billion)reported for the first half 2003.

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Munich Re reported gross premiums written of 20.8 billion euros($22.6 billion) for the first half of 2003, compared to 20.4billion euros ($22.2 billion) for the first half 2002.

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In a statement after the earnings announcement, Fitch Ratingssaid it “expects Munich Res near and long-term underwritingprofitability as measured by [its] combined ratio will be betterthan the reinsurance industrys average.”

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Results for the half “send a mixed signal in that, whileunderlying profitability is indeed improving, bottom line resultsremain weak,” Fitch said, noting that it is conducting a review ofthe major reinsurers and plans to make further comment about MunichRe following a meeting over the next few weeks.


Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 1, 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.


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