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

Mon Jun 23, 2014 7:06am EDT

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June 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 available at the end of this comment.

KEY RATING DRIVERS

The ratings reflect Munich Re's very strong risk-adjusted capitalisation, as well as the generation of strong and consistent earnings. The ratings are also supported by the significant scale, dominant market position and diversity of Munich Re's (re)insurance operating companies. Fitch views these factors as providing the reinsurer with a high level of resilience to currently adverse pricing conditions across certain major reinsurance markets.

The agency considers Munich Re's robust business model as a key advantage compared with other reinsurance groups. Fitch expects that the core reinsurance business will continue to drive profitability across the rating horizon, with the ERGO-brand primary insurance operations providing earnings and business diversity.

Despite the diversity of operating companies, past group results have exhibited volatility due to the significant scale of the P&C reinsurance segment. P&C reinsurance contributed over 70% of group net profits in 2013 (2012: 81%). 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.

Munich Re uses limited retrocession coverage and other forms of risk mitigation, leaving net losses 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 were closer to the historical average, the group generated the majority of its profits from its P&C reinsurance operations, benefiting from overall solid margins within its catastrophe book.

Fitch regards Munich Re's capitalisation as very strong and commensurate with the ratings. 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.

Fitch views Munich Re's gross financial debt leverage as commensurate with the ratings, standing at 16% at end-2013. The agency expects that leverage will remain within an acceptable range for the ratings in the medium term. Asset risk is low to moderate with little exposure to equities and alternative investments, and credit risk is moderate.

Munich Re's primary life and international primary non-life operations continue to improve. Over the medium-term, earnings contributions from these operations are expected to form a more significant part of overall group earnings.

RATING SENSITIVITES

Munich Re's ratings could be upgraded if it improves profitability on a sustained basis with 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 as 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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