December 8, 2016 / 12:34 PM / in 8 months

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

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(The following statement was released by the rating agency) LONDON, December 08 (Fitch) Fitch Ratings has affirmed Munich Reinsurance Company's (Munich Re) Insurer Financial Strength (IFS) rating at 'AA' and Long-Term Issuer Default Rating (IDR) at 'AA-'. Fitch has also affirmed the ratings of Munich Re's core operating subsidiaries. The Outlooks are Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS The affirmation reflects the strength of Munich Re's franchise and financial profile within the global reinsurance sector, a view that is supported by strong and consistent property and casualty (P&C) reinsurance results and very strong capitalisation. Fitch regards Munich Re's reinsurance operation as one of a very select group that has the scale, diversity and financial strength to attract the highest quality business being placed into the global reinsurance market. A marginal offsetting factor is the mixed performance of the reinsurer's ERGO-branded primary insurance operations. Fitch expects P&C reinsurance earnings metrics will remain commensurate with a 'AA' rating in the next 12 to 18 months. The P&C reinsurance division reported a combined ratio of 93.7% for 9M16 (2015: 89.7%), helped by lower-than-expected natural catastrophe claims and strong reserve releases. The normalised combined ratio, adjusting back for variations in reserving and major losses versus budget, deteriorated to 99.9% for 9M16, reflecting the effects of a protracted soft market. This is likely to increase the sensitivity of future underwriting profitability, to even a modest rise in major loss claims. We expect that the P&C reinsurance segment will continue to account for a major part of the company's operating earnings in the foreseeable future. Fitch regards Munich Re's capitalisation as very strong, and financial leverage as moderate. The company's reported Solvency II ratio was very strong at around 250% at end-3Q16, well above the 220% top end of the reinsurer's target range. Munich Re's very strong capitalisation enables it to provide underwriting capacity on a continuous and large scale basis. In May 2016, Munich Re's primary insurance group ERGO Group AG announced a restructuring programme whereby Munich Re will invest about EUR1bn (net) in improving ERGO's competitiveness and profitability. The costs associated with the ERGO strategy led Munich Re to lower its profit guidance to EUR2.3bn for 2016, from EUR2.3bn-EUR2.8bn previously. However after a strong result in 3Q, Munich Re now expects annual profit to significantly exceed the EUR2.3bn guidance. Fitch recognises that the current operating environment remains challenging for Munich Re and the wider (re)insurance industry. Persistently low interest rates and increasingly intense competition, especially in non-life reinsurance, continue to drive price softening across certain major reinsurance classes. The agency expects Munich Re's diversified business profile and prudent underwriting policy to help the reinsurer to weather a protracted period of price softening. RATING SENSITIVITIES Munich Re has the joint-highest IFS rating among European (re)insurance groups and an upgrade is unlikely in the near term. The key rating triggers that could result in a downgrade include a sustained material drop in the company's risk-adjusted capital position to below 'very strong', as measured by Prism FBM, a through-cycle Fitch-calculated combined ratio of 97% or above, or significant underperformance relative to peers. FULL LIST OF RATING ACTIONS Munich Reinsurance Company: IFS Rating: affirmed at 'AA'; Outlook Stable Long-Term IDR: affirmed at 'AA-'; Outlook Stable Subordinated debt: affirmed at 'A' GBP300m subordinated debt (XS0167260529): affirmed at 'A+' DKV Deutsche Krankenversicherung IFS Rating: affirmed at 'AA'; Outlook Stable ERGO Group AG Long-Term IDR: affirmed at 'AA-'; Outlook Stable Europaeische Reiseversicherung AG IFS Rating: affirmed at 'AA'; Outlook Stable Munich Reinsurance America Corporation Long-Term IDR: affirmed at 'AA-'; Outlook Stable Senior unsecured debt: affirmed at 'AA-' VORSORGE Lebensversicherung AG IFS Rating: affirmed at 'AA'; Outlook Stable The following Munich Re entities' IFS ratings have been affirmed at 'AA' with Stable Outlook: Munich Reinsurance America, Inc. Hartford Steam Boiler Inspection and Insurance Company The following Munich Re entities' IFS ratings have been affirmed at 'A+' with Stable Outlook: ERV Foersaekringsaktiebolag (publ) Europaeiske Rejseforsikring A/S Contact: Primary Analyst Graham Coutts Director +44 20 3530 1211 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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