Rating concerns for Munich Re group and Liberty Mutual

In two separate actions, financial rating agency Moody’s Investors Service has downgraded Munich Reinsurance Co. to “Aa3” from “Aa1” while Standard & Poor’s has placed the Boston-based insurer Liberty Mutual Insurance Co. on credit watch with its current “A (plus)” rating under negative implications. In both cases, the rating agencies expressed concern with regard to sharp surplus declines experienced by both companies during 2002.Moody’s rating downgrade of Munich Re included the group’s Germany, Hamburg-based Hamburg-Mannheimer Versicherungs AG and Victoria Lebensversicherung AG. The rating agency also reduced the rating of Munich Re’s U.S. subsidiary American Reinsurance Co. to “A2” from “Aa2” and its senior debt to “A3” from “Aa3”. Moody’s cites the dramatic decline in the Munich Re group’s capitalization as the prime reason for the downgrades. The rating agency does not expect that Munich Re will achieve its 2003 target of a 104% combined ratio while poor investment returns will continue to undermine the group’s income statement and balance-sheet. The financial pressure questions the group’s ability to support American Re which in its own right is experiencing capital restraints while the company will likely have to further boost its asbestos reserves, the rating agency says.Similarly, Standard & Poor’s is concerned with the surplus drop experienced by Liberty Mutual, with the insurer having shed about US$600 million in the value of reserves over the past year, with surplus at the end of 2002 clocking in at US$5.2 billion (2001: US$5.8 billion). Much of the capital decline suffered by Liberty Mutual resulted from the company’s particular investment mix, the rating agency says. Furthermore, the insurer boosted asbestos reserves by US$300 million last year with an additional US$300 million set aside for non-asbestos liabilities. The rating agency believes that strengthened pricing will be inadequate in lifting the company’s profitability relative to the earnings drain of reserve shoring.