OREANDA-NEWS. 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 achieved a below target (95%) combined ratio of 90% for FY15 (FY14: 93%), helped by lower than expected natural catastrophe claims. We note that the normalised combined ratio, adjusting back for variations in reserving and major losses versus budget, deteriorated to close to 99%, 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 reported its solvency margin under Solvency II (SII) for the first time at 1 January 2016, and coverage was very strong at 302%. This is 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, should it so wish.

In May 2016, Munich Re's primary insurance group ERGO Group AG announced a restructuring programme which will last until 2020. Munich Re will invest about EUR1bn (net) in improving ERGO's competitiveness and profitability. The programme targets a sustainable annual net profit of at least EUR500m after 2020 including net cost savings of EUR280m. The restructuring programme also includes that ERGO's major German life insurer ERGO Lebensversicherung AG will cease writing new business no later than 2020. Through this, Munich Re will handle the largest run-off in the German life market. Fitch notes that the costs associated with the ERGO strategy led Munich Re to lower its profit guidance to EUR2.3bn for 2016, from its previous guidance of a range of EUR2.3bn-EUR2.8bn (actual 2015: EUR3.1bn). Fitch believes that there is an increased probability of Munich Re posting lower earnings in future, than in recent years.

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 provide resilience to a protracted period of price softening, should this occur.

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 cross-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