But, Munich Re said the S&P downgrade was “unjustified” and the reasons given for the measure were “unconvincing.”

The company pointed to the fact that the groups equity funds increased in the second quarter by around 50 percent to over 18 billion euros ($19.6 billion). Further, Munich Re said, the financial strength of the group has improved, evidenced by a reinsurance combined ratio of 95.9 and an insurance combined ratio of 96.

The downgrade reflects “a re-evaluation by Standard & Poors of reinsurance industry risk and of Munich Res position within that industry following the historic relative underperformance in its non-life underwriting profitability,” said S&P credit analyst Nigel Bond in a statement.

“The action also reflects the slower-than-expected recovery in Munich Res earnings and the impact this could have on the groups ability to replenish capital during the current hard phase of the cycle,” said S&P. “Nevertheless, the ratings remain underpinned by Munich Res very strong business position.”

Despite its pessimistic view of the industry and Munich Res fortunes, S&P said it expects operating results “to rebound significantly for the year ending Dec. 31, 2003, as the impact of price increases and tighter terms and conditions continues to take effect.”

Consequently, S&P said the outlook for Munich Re is stable, which it based on an expectation that Munich Re “will improve earnings, rebuild capital and maintain its very strong business position in both the non-life and life reinsurance markets.”

“Munich Re could either accept the downgrade or raise some capital to stop it, and they decided to accept the downgrade and not raise capital, which I thought was the less likely option,” said Christopher Hitchings, European insurance analyst with Commerzbank Securities in London.

A Munich Re representative said the company will not raise capital just “to satisfy a rating company.”

“Of course, as a professional reinsurer we are examining all options we have, but if and when we do any kind of capital measures, [it will be a path] we will decide after weighing all the pros and cons and what implications this will have for all our stakeholders, but not just because a rating agency brings pressure on us,” the representative said.

In its half-yearly figures, Munich Re reported the loss of 603 million euros ($656.1 million), compared to a profit of 4.1 billion euros ($4.5 billion) for the first half last year. (The 2002 result for the half was boosted as a result of the sale of some of the holdings in Allianz.)

Pre-tax operating results for the half came to 777 million euros (845.5 million), compared with 3.5 billion euros ($3.8 billion) reported for the first half 2003.

Munich Re reported gross premiums written of 20.8 billion euros ($22.6 billion) for the first half of 2003, compared to 20.4 billion euros ($22.2 billion) for the first half 2002.

In a statement after the earnings announcement, Fitch Ratings said it “expects Munich Res near and long-term underwriting profitability as measured by [its] combined ratio will be better than the reinsurance industrys average.”

Results for the half “send a mixed signal in that, while underlying profitability is indeed improving, bottom line results remain weak,” Fitch said, noting that it is conducting a review of the major reinsurers and plans to make further comment about Munich Re following a meeting over the next few weeks.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.