OREANDA-NEWS. Fitch Ratings has upgraded Munich Reinsurance Company's (Munich Re) Insurer Financial Strength (IFS) rating to 'AA' from 'AA-' and affirmed the reinsurer's Long-term Issuer Default Rating (IDR) at 'AA-'. These actions also apply to the ratings of core operating subsidiaries. The Outlooks are Stable.

Fitch has simultaneously affirmed Munich Re's subordinated debt at 'A', with the exception of the GBP300m subordinated debt issue (XS0167260529), which has been upgraded to' A+' from 'A'. A full list of rating actions is at the end of this commentary.

The ratings reflect Fitch's recently updated notching criteria for the insurance sector, published on 14 July 2015. This followed publication of an initial exposure draft of proposed criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.

The upgrade of the IFS ratings reflects mainly the realignment exercise for reinsurers that has been undertaken following the publication of Fitch's revised notching guidelines, which included an extensive peer review analysis of relative rating levels.

The upgrade also recognises 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.

KEY RATING DRIVERS
Fitch expects P&C reinsurance earnings metrics will remain commensurate with a 'AA' rating in the next 12 to 18 months, with the segment reporting a Fitch-calculated combined ratio of 92.7% at end-2014 (end-2013: 92.1%). The agency expects that the P&C reinsurance segment will continue to account for a major part of the company's operating earnings in the foreseeable future.

Based on an assessment of capital and leverage metrics, Fitch regards Munich Re's capitalisation as very strong. The total financing and commitments ratio was steady at 0.5x at end-2014, which Fitch views as 'average'. Financial leverage is also moderate, reducing to 15% at end-2014 (end-2013: 16%).

The reinsurer's IFRS equity is sensitive to interest-rate-induced movements in the market value of its fixed-interest investment portfolio. The agency believes that on an economic-value basis, this sensitivity would be reduced by offsetting movements in the value of liabilities. Munich Re's very strong capitalisation enables it to provide underwriting capacity on a continuous and large-scale basis, should it so wish.

The performance of Munich Re's ERGO-branded primary insurance businesses remains mixed, but the division's contribution to earnings is expected to be more consistent in the medium term. The German primary life operations continue to faces challenges related to high levels of interest guarantees, due to the persistence of low investment yields. The underlying primary P&C insurance result continues to improve.

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: upgraded to 'AA' from 'AA-'; Outlook Stable
Long-term IDR: affirmed at 'AA-'; Outlook Stable
Subordinated debt: affirmed at 'A'
GBP300m subordinated debt (XS0167260529): upgraded to 'A+' from 'A'

DKV Deutsche Krankenversicherung
IFS rating: upgraded to 'AA' from 'AA-'; Outlook Stable

ERGO Lebensversicherung AG
IFS rating: upgraded to 'AA' from 'AA-'; Outlook Stable

ERGO Versicherungsgruppe AG
Long-term IDR: upgraded to 'AA-' from 'A+'; Outlook Stable

ERV Europaeische Reiseversicherung AG
IFS rating: upgraded to 'AA' from 'AA-'; Outlook Stable

Munich Reinsurance America Corporation
Long-term IDR: upgraded to 'AA-' from 'A+'; Outlook Stable
Senior unsecured debt: upgraded to 'AA-' from 'A+'

VORSORGE Lebensversicherung AG
IFS rating: upgraded to 'AA' from 'AA-'; Outlook Stable

The following Munich Re entities' IFS ratings have been upgraded to 'AA' from 'AA-' with Stable Outlook:

Munich Reinsurance America, Inc.
Hartford Steam Boiler Inspection and Insurance Company

The following Munich Re entities' IFS ratings have been upgraded to 'A+' from 'A' with Stable Outlook:

ERV Foersaekringsaktiebolag (publ)
Europaeiske Rejseforsikring A/S.