Munich Re announced last week that it would boost reserves for its American Re subsidiary by $1.6 billion to cover U.S. casualty and asbestos policies.
Chief Executive Officer Nikolaus von Bomhard said Munich Re will maintain its targeted return on equity of 12 percent. He said the Princeton, N.J.-based American Re will remain the core for its parent company.
The increase will cut second-quarter profits by $480 million, he noted. “The effects of the reserve strengthening on our group results are limited due to early provision made through group [incurred but not reported] reserves,” he said during an analysts' conference call.
Moody's Investor Service reaffirmed Munich Re's “Aa3 with stable outlook” rating but said it would re-examine American Re's rating. While noting the reserving was larger than expected, Moody's said the parent company has made progress in taking some risk out of the asset side of the balance sheet.
Moody's added the fact that Munich Re has reduced its financial leverage and committed itself to further reduction over the next 18 months was also a factor in the lack of any ratings change.
Standard & Poor's said it expected to raise ratings on American Re by one notch since the actions Munich Re has taken indicate its American Re subsidiary is now a core member of the German company.
Mr. von Bomhard said he had confidence in the reserving since the figures chosen for each accident year and line of business were in the higher range of the actuarial projection.
The hike will cut second-quarter Munich Re group profits by $480 million
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