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S&P upgrades Munich Re to AA-

Munich Re regained its targeted AA- rating from Standard & Poor’s (S&P) last month with the rating agency upgrading the German giant from A+ and assigning a stable outlook on 22 December.

In a statement, S&P said the upgrade of the reinsurer’s long-term counterparty credit and insurer financial strength ratings reflected “major and sustained improvements in operating performance, a strong enterprise risk management (ERM) framework, and increased certainty about the adequacy of Munich Re’s overall reserve position”.

It added that Munich Re’s strong competitive position, capitalisation and financial flexibility also supported the rating; but the challenge to expand “within the constraints of a more conservative risk profile” and its “underperformance during the past soft cycle” are also reflected.

The move comes after the rating agency assigned a positive outlook to Munich Re’s ratings in June, heightening expectations of an upgrade.

At the time, S&P commented: “An upgrade would be driven by the combination of the satisfactory conclusion of S&P review of group loss reserves, the assessment of ERM as at least strong, and continuing positive trends in earnings.”

In its upgrade statement S&P said that, with Munich Re expected to reach net earnings of at least EUR3.2bn, the “considerable earnings improvements” demonstrated by the reinsurer since 2003 have continued in line with its expectations.

It also praised a strong ERM framework that “should further enhance Munich Re's ability to deliver sustained earnings improvements”.

“The group benefits from risk controls that are strong for material risks to which it is exposed, an excellent emerging risk-management process, and strong strategic risk management,” it explained.

“The latter allows Munich Re to effectively evaluate risk-reward trade-offs when making strategic decisions and should ultimately provide the group with a competitive edge relative to peers with a less developed ERM framework,” it continued.

The potential impact of effective ERM on a reinsurer’s capital requirements and rating had been flagged by S&P and other rating agencies at the Monte Carlo Rendez-Vous in September.

S&P said that for companies that had achieved the highest levels of ERM and whose economic capital models formed part of their approach to ERM, individual analysis will be introduced in 2007 that could impact on capital requirements.

“For companies that turn out to be either ‘excellent’ or ‘strong’, there may be a knock-on effect to their capital requirements,” S&P credit analyst Rob Jones told our sister title The Insurance Insider.

“We’ve actually isolated it as a category we are going to assess. By the end of the year it will be clear to the market what we think of the risk management capabilities of [the likes of] Allianz, AXA, Swiss Re and Munich Re.

On the upgrade, S&P also highlighted Munich Re’s ability to access high quality business, and influence terms and conditions, compared to most of its rivals.

“The group’s low use of retrocession compared with some peers provides a competitive advantage in the current property/casualty reinsurance marketplace, where retrocession capacity is tight and therefore prices are high,” it added.

It predicted the company will achieve return on equity of “at least 10 percent to 12 percent” along with a combined ratio of below 100 percent in both reinsurance and insurance.

In its life and health business, S&P said it expects the value of new business to the present value of in-force business after cost of capital to be about 7 percent with an overall new business margin of around 3 percent.

The agency suggested a revision to a positive outlook, ahead of possible further upgrades, “would depend on the group significantly outperforming these targets over a sustained period”.

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