RPT-Fitch Affirms Munich Re's IFS Rating at 'AA-'; Outlook Stable

Tue Jul 23, 2013 6:38am EDT

July 23 (Reuters) - (The following statement was released by the rating agency)

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 also 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, which is commensurate with the current rating, and the group's diversified business model, which contributes towards earnings stability. Fitch anticipates that losses arising from the recent severe flooding that has occurred in Central Europe and Canada will be manageable for the reinsurer.

The agency considers Munich Re's robust business model as a key advantage compared with other groups. Munich Re's ability to generate strong and consistent earnings is underpinned by the large scale and relative diversity of (re)insurance operating companies that combine to form the Munich Re Group.

Fitch anticipates that the core reinsurance business will continue to drive profitability across the rating horizon, with the ERGO-branded primary insurance operations providing a level of earnings and business diversity.

Despite the relative diversity of operating companies, past group results have exhibited a relative volatility due to the significant scale of the P&C reinsurance segment. Underwriting performance compared with a peer group of Fitch's rated reinsurance universe is viewed as a key factor in determining the future direction of the rating.

Fitch regards Munich Re's capitalisation as strong and commensurate with the rating level. While the reinsurer's IFRS equity is sensitive to interest rate-induced movements in the market value of its fixed-interest investment portfolio, the agency considers that such sensitivity on an economic value basis would be reduced by offsetting movements in the value of liabilities. Strong capitalisation enables the reinsurer to provide underwriting capacity on a continuous and large scale basis, should it wish to do so.

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 19% at end-2012. Fitch anticipates that leverage will further reduce at end-2013 due to the calling of EUR1.0bn of debt in June 2013. Fitch considers asset risk as low to moderate with little exposure to equities and alternative investments and moderate credit risk. Offsetting rating 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 continues to closely follow the restructuring of Munich Re's primary operations and the effect it has on profitability.

RATING SENSITIVITIES

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 multi-year average 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, a multi-year average combined ratio of 102% or above, 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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