The reinsurer said it intends to make use of the stronger capital base to expand its leading market position, especially in the reinsurance area, by taking selective advantage of profitable growth opportunities.

Munich Re said the market environment for reinsurance is particularly favorable "because of the high demand for risk assumption and the reduced supply of capacity, the outcome being better premiums and conditions."

"What our clients are looking for are not only competence and quality but also security and solidity," said Hans-Jurgen Schinzler, chairman of the board of management of Munich Reinsurance Company, in a statement. "A broader capital base will enable us to take advantage of additional earnings opportunities and to finance selective growth in promising markets."

Standard & Poor's Ratings Services, which downgraded Munich Re to "A-plus" from "double-A-minus," said the rights issue "will significantly improve the quantity and quality of Munich Re's capital when completed."

In addition, Moody's Investors Service in London affirmed the financial strength ratings of Munich Re at "Aa3," although the outlook remains negative. Moody's also affirmed the ratings of American Re at "A2," Hamburg-Mannheimer Versicherungs-AG at "Aa3" and Victoria Lebensversicherung AG at "Aa3."

But, Commerzbank Securities in London had a negative reaction stating that even 3.8 billion euros is not enough additional capital without a reduction in Munich Re's equity holdings.

Munich Re needs new equity of 4 billion to 4.5 billion euros ($4.6 billion-$5.2 billion) to justify a "double-A" rating, Commerzbank said, confirming, however, that the capital increase "represents a welcome recognition of reality by the firm?"

"Munich Re's balance sheet problems relate to a combination of inadequate capital and excess equity investment (insurers need capital to support the volatility of holding equities," Commerzbank Securities said.

"The capital raising underlines the very strong financial flexibility enjoyed by the group and supports Munich Re's long-term strategy," said Stephen Searby, credit analyst with S&P, in London. "It is also consistent with [S&P's] expectation that the group's capital adequacy ratio will be improved to the [double-A] range by the end of 2004," he added in a statement.

In addition to the proposed offering, "Munich Re's capitalization should continue to benefit from existing and proposed initiatives to reduce risk on the group's balance sheet," S&P said.

The ratings on the operating entities of the group, S&P said, "will be primarily driven by the extent to which Munich Re can sustain the improved operating performance seen in the first half of 2003, both relative to its historical results and relative to the industry."

S&P noted that for the first half of 2003, Munich Re's combined ratio was 95.9, compared with 133.1 for the same period last year. S&P "expects this improvement to be reflected in the full-year underwriting results, but that continued investment impairments and proposed changes to the German tax regime will affect reported retained profits," the ratings agency said.

Moody's said the rating affirmation reflects the agency's view that "the prospective capital-raising exercise will be an important step in rebuilding Munich Re's capital base, which has been significantly weakened since the year 2000 due to operating losses, capital markets effects and reserve strengthening."

With a stronger capital base, the company will be able "to take advantage of continued strong underwriting conditions in its core reinsurance business," Moody's said.

Offsetting the positive aspects of the rights issue, Moody's noted that Munich Re's capital situation is still negatively affected by "the volatility of its equity base related to changes in securities values, given the elevated levels and the concentration of shares relative to its capital base?over 100 percent before the impact of hedges and without the inclusion of the proceeds of the forthcoming rights issue."

Munich Re said the subscription period for the issue is planned for Oct. 28 to Nov. 10, when Munich Re shareholders can subscribe for two new Munich Re shares for every seven old shares held. The total of 50,912,946 new shares will be entitled to a dividend retroactively from Jan. 1, and therefore for the whole of 2003, the company said.