Canadian Underwriter

Munich Re downgraded on second-quarter loss

August 29, 2003   by Canadian Underwriter

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After posting its second quarterly loss in a row, Munich Re saw its ratings further downgraded by Standard & Poor’s (S&P). The world’s largest reinsurer posted a first-half 2003 net loss of EUR603 million (Cdn$915 million), following net income of EUR4.1 billion (Cdn$6.2 billion) in first-half 2002.
The loss prompted S&P to lower the reinsurer’s financial strength and long-term counterpary credit ratings to A+ from AA-, but with a stable outlook.
“The downgrade primarily reflects a re-evaluation by Standard & Poor’s of reinsurance industry risk, and of Munich Re’s position within that industry following the historic relative under-performance in its non-life underwriting profitability,” says S&P credit analyst Nigel Bond.
The rating takes into account Munich Re’s strong business position, and despite a slower than anticipated recovery, S&P does say it expects Munich Re can improve earnings and rebuild capital.
It also highlights Munich Re’s improving combined ratio, which was 95.9% for its reinsurance operations as of mid-year 2003. This compares with a total combined ratio of 122.4% for all of last year.
S&P also predicts “substantial” capital raising activities in the near future, something which has been speculated on by the media. However, it notes that quality of capital will continue to be impacted by the company’s concentration of investments.
Munich Re responded with disappointment to the downgrade, calling it “unjustified”. It points to the improved combined ratio as well as the turnaround in its largest subsidiary, American Re, which has turned a profit since the beginning of the year. “It is regrettable that the standard model agency Standard & Poor’s obviously fails to take account of the strengths of Munich Re,” says Munich Re chairman Dr. Hans-Jurgen Schinzler. “We will be continuing our discussions with the rating agency regarding this point.”

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