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.
The ratings reflect Munich Re’s strong capital position, low debt leverage and strong interest rate coverage, low to moderate asset risk, the stabilising effect on earnings of the growing portion of life reinsurance business and the superior franchise of the group’s reinsurance operations. The ratings also take into account the effectiveness of Munich Re’s cycle management and risk management, as well as the diversification benefit from the primary insurance operations within the group.
Munich Re’s ratings have been affirmed despite high catastrophe losses experienced in Q111 leading to a combined ratio of 159.4% and the 11% decline in shareholder funds, which was mainly caused by these losses and increase in interest rates. Fitch notes that Munich Re is more exposed to the Australian floods and the New Zealand and Japanese earthquakes than some of its peers, although the losses are not out of line with the company’s market share in the respective regions. Munich Re’s Q111 catastrophe losses expressed as a percentage of shareholders’ funds amount to 12%, which is slightly higher than its main European peers but lower than many of its Bermudian peers.
Munich Re uses limited retrocession coverage or other forms of risk mitigating, leaving net losses relatively near to gross losses. Fitch views Munich Re’s catastrophe risk as reasonable in the context of a highly geographically diversified catastrophe portfolio and in context of the group’s strong capital position. Fitch notes that the group continues to generate the majority of its profits from its P&C reinsurance operations, benefiting from overall solid margins within its catastrophe book. Fitch expects Munich Re to benefit from improved market conditions triggered by recent events.
Offsetting factors include relatively low profitability levels generated by the primary life operations and issues with deteriorating underwriting performance within its international primary non-life operations. Fitch also notes that Munich Re’s underwriting performance within the P&C reinsurance segment is average compared to peers, although Munich Re’s cross cycle target of a 97% combined ratio has been met over the past five years.
Munich Re’s capital position in 2010, measured by Fitch’s stress test and the company’s own internal model, remained essentially at the same level as 2009. When taking into account the hit on capital in Q111, the group’s capitalisation still remains commensurate with its current ratings. Fitch considers the Q111 catastrophe losses as an earnings event for Munich Re as opposed to a capital event. However, Fitch notes that further severe catastrophic events might start to erode Munich Re’s capitalisation and also notes the group’s high sensitivity to interest rate movements, with an increase in interest rates by 100 basis points resulting in a decline in shareholders’ funds of EUR2.5bn at Q111. From an economic perspective Munich Re’s capital is less interest rate sensitive.
The key rating drivers that could result in an upgrade include underwriting profitability that outperforms peers over the cycle, maintenance of a strong capital base on a risk-adjusted basis at YE2010 levels as measured by Fitch’s stress test.
The key rating drivers that could result in a downgrade include a sustained material drop in the company’s risk-adjusted capital position measured by Fitch’s stress test, failure to maintain a disciplined underwriting approach or strong underperformance of peers.
Source : Fitch Press Release
