TEXT-Fitch affirms Munich Re's IFS rating at 'AA-'
May 25 - Fitch Ratings has affirmed Munich Reinsurance Company's (Munich Re) Insurer Financial Strength (IFS) rating and Long-term Issuer Default Rating (IDR) at 'AA-' with Stable Outlooks. Fitch has additionally affirmed the ratings of certain entities within the Munich Re group. A full list of rating actions is at the end of this comment. The affirmation reflects the group's strong though slightly weakened capital position and relatively resilient earnings despite high catastrophe losses in 2011 and write-downs relating to Greek government bonds. Fitch notes that the net income of EUR712m for the year included a tax benefit of EUR550m. According to Fitch's risk-based capital assessment Munich Re's capitalisation slightly weakened in 2011 mainly due to higher capital charges relating to increases in reinsurance premiums and lower value in force (VIF) in the primary operations. In Q112 the group's capital position partly rebounded mainly due to strong retained earnings. Fitch views positively the fact that the share buyback programme is on hold. Overall, Fitch considers Munich Re's capitalisation as strong and commensurate with the rating level. Fitch considers Munich Re's robust business model as a key advantage compared to other groups. Its diversified earnings stream allowed the company to offset some of its natural catastrophe related losses with earnings generated within the life reinsurance segment and its primary operations. The contribution of life reinsurance is growing, which Fitch views positively, as the segment's steady cash flows add stability to the relatively volatile property and casualty reinsurance results. Munich Re benefits from the superior franchise of its reinsurance operations. However, in Fitch's opinion Munich Re's underwriting performance in the P&C reinsurance segment is a weakness relative to peers. Munich Re uses limited retrocession coverage and other forms of risk mitigation, leaving net losses relatively near to gross losses. Fitch considers Munich Re's catastrophe risk as reasonable in the context of a highly diversified catastrophe portfolio by geography and in context of the group's strong capital position. Fitch notes that in a year of more normalised catastrophe activity the group generates the majority of its profits from its P&C reinsurance operations, benefiting from overall solid margins within its catastrophe book. Munich Re's achieved a rate increase of 2% in the January renewals and 5% in the April renewals. Fitch notes that Munich Re has acted cautiously in recent renewals, adhering to its cycle management and peak exposure risk management principles. The ratings also reflect Munich Re's debt leverage, which is commensurate with the rating. Fitch notes that financial leverage is slightly elevated at Q112 at 22%. Fitch expects leverage to drop to historical levels since Fitch expects the outstanding EUR1.0bn to be called in June 2013. Interest rate coverage suffered in 2011 due to the low earnings but is expected to recover. Fitch considers asset risk as low to moderate with little exposure to equities and alternative investments and moderate credit risk. Munich Re has strongly decreased its peripheral eurozone exposure, which equates to 23% at Q112 (2010: 50%) of shareholders' funds. Fitch views this as manageable. Offsetting factors include the relatively low profitability levels generated by the primary life operations and issues with weak but improving underwriting performance within Munich Re's international primary non-life operations. Fitch will continue to follow closely the restructuring of Munich Re's primary operations and the effect of this on profitability. Fitch views the recently announced sale of the loss-making Korean primary subsidiary DAUM Direct positively. Ratings could be upgraded if Munich Re improves profitability on a sustainable basis to a return on equity of 10% or above and a combined ratio of 96% or lower, provided the capital base remains strong on a risk-adjusted basis. The key rating drivers that could result in a downgrade include a sustained material drop in the company's risk-adjusted capital position measured by Fitch's risk-based capital assessment, failure to maintain a disciplined underwriting approach, or strong underperformance relative to peers. The rating actions are as follows: Munich Re: IFS rating: affirmed at 'AA-'; Outlook Stable Long-term IDR: affirmed at 'AA-'; Outlook Stable All subordinated debt ratings: affirmed at 'A' Munich Re America, Inc. IFS rating: affirmed at 'AA-'; Outlook Stable Munich Re America Corporation IDR rating: affirmed at 'A+'; Outlook Stable USD500m senior debt due 2026: affirmed at 'A+' Hartford Steam Boiler Inspection & Insurance Co. IFS rating: affirmed at 'AA-'; Outlook Stable Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Insurance Rating Methodology', dated 16 August 2010, 'Non-Life Insurance Rating Methodology', dated 24 March 2010, and 'Fitch's Approach to Rating Insurance Groups', dated 14 December 2010, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology
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