Canadian Underwriter

Willis up, Hannover Re down, Munich Re on watch: Moody’s

March 26, 2003   by Canadian Underwriter

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Rating agency Moody’s has upgraded the senior bank credit facility of Willis North America Inc., the world’s third largest brokerage, to Ba1 from Ba2. At the same time, the broker’s senior subordinated debt rating has been upped to Ba2 from Ba3, with the outlook positive on both ratings.
Moody’s cites the “significantly improved financial fundamentals” of Willis. “The benefits of the current hard market, a significant focus on both generating new sales and maintaining existing business as well as careful expense management have combined to generate strong revenue growth and significantly improved earnings.”
Mitigating the upgrade is Willis’ potential involvement in the legal conflict over policies covering the World Trade Center as the broker on the account, although Moody’s sees this potential as remote.
The news was not so good for Germany’s Hannover Reinsurance Co., which saw its subordinated debt downgraded to Ba1 from Baa1. As well Hannover Re and subsidiary E&S Ruckversicherungs saw their financial strength ratings lowered to Baa1 from A2, with a negative outlook on all ratings.
The move follows a rating review that began last December, with Moody’s concluding “Hannover Re’s high levels of financial and operational leverage relative to peers” were sufficiently troubled, and likely to remain so for the short to mid-term. The rater has concerns about Hannover Re’s high level of reinsurance recoverables, specifically uncollateralized recoverables.
In a press release responding to the downgrade, Hannover Re remarks that 89% of the recoverables are due from companies rated A or better by Standard & Poor’s, and as such the reinsurer sees no significant risk of loss.
Moody’s did note that the company is well-positioned to benefit from the current favorable reinsurance market conditions, and that substantial lowering of risk factors could lead to positive rating actions.
Finally, the financial strength rating of Germany’s Munich Reinsurance Company and the financial strength and debt ratings of its U.S. subsidiary American Re Corp. have been placed on review. The review also applies to Munich Re’s primary life insurers, Hamburg-Mannheimer Versicherungs and Victoria Lebensversicherung.
The review is prompted by concerns about Munich Re’s capitalization due to the reduced value of cross shareholdings, specifically in Allianz and HVB. Moody’s also sees the potential for earnings to be hit by the current dismal investment situation and possible additional impairment charges.
The ability to generate internal capital in light of the investment malaise, and the strength of earnings from core operations, including ERGO and American Re, will be a focus of the review. As well, Moody’s will be taking a hard look at Munich Re’s level of support for American Re.
Currently, Munich Re has a financial strength rating of Aa1, and American Re’s financial strength is rated Aa2, with a senior debt rating of Aa3.

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