TEXT-Fitch affirms Munich Re's IFS rating at 'AA-'; outlook stable

Mon Feb 18, 2013 7:42am EST

Feb 18 - 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.

KEY RATING DRIVERS

The affirmation reflects Munich Re's strong level of risk-adjusted capitalisation and the group's diversified business model, which contributes towards earnings stability. Preliminary full-year 2012 results reported by the reinsurer confirm a significant rise in post-tax income to EUR3.2bn (2011: EUR770m), driven by a recovery in the contribution made by the reinsurance segment, following a reduction in the level of natural catastrophe claims across 2012, when compared to 2011.

Munich Re's capital position is expected to strengthen as a result of a relative increase in retained profits from FY2012 earnings. However, the group's shareholders' funds of EUR27.4bn at end-2012 (end-2011: EUR23.3bn) includes unrealised gains on fixed income available for sale assets, which have partly arisen through the prevailing low interest rate environment. An increase in interest rates would result in decreased market values for bonds, which would lead to a corresponding reduction in shareholders' funds. Currently, Fitch considers Munich Re's capitalisation as strong and commensurate with the rating level.

The agency considers Munich Re's robust business model as a key advantage compared to other groups. Historically, the reinsurer's diversified earnings stream has allowed the company to offset a proportion of natural catastrophe related losses with earnings generated by the life reinsurance segment and its primary insurance 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 (P&C) reinsurance results.

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 relation to the group's strong capital position. The agency notes that in years where catastrophe losses are closer to the historical average, the group generates the majority of its profits from its P&C reinsurance operations, benefiting from overall solid margins within its catastrophe book.

The agency considers Munich Re's gross financial debt leverage to be commensurate with the rating, standing at 21% at Q312. Fitch anticipates that gross financial leverage will decrease further in the medium-term. Fixed charge coverage improved at Q312, due to strong operating earnings.

Fitch considers asset risk as low to moderate with little exposure to equities and alternative investments and moderate credit risk. Munich Re has decreased its peripheral eurozone exposure to a level that Fitch views as very 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.

RATING SENSITIVITES

Munich Re's ratings could be upgraded if it 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 triggers 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

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