New York-based Moody's said the rating action involves lowering financial strength ratings to "Aa3" from "Aa1" for Munich Reinsurance Company, as well as the group's Hamburg-Mannheimer Versicherungs AG and Victoria Lebensversicherung AG.
Additionally, the ratings agency also cut financial strength rating of the Munich-based reinsurer's U.S. unit, American Re-Insurance Company, to "A2" from "Aa2," and its senior debt to "A3" from "Aa3." All the ratings, Moody's noted, carry a negative outlook.
One of the main reasons for these downgrades is the sharp decline in Munich Re's capitalization, which continues to exert pressure on the group's capital base this year, Moody's stated.
Moody's said the drop in capitalization is primarily caused by the reduced value of Munich Re's cross shareholdings, mostly in Allianz AG and HVB Group, both headquartered in Munich, Germany.
The ratings agency also warned that it expects Munich Re's earnings to be hurt this year by modest investment returns, and that the reinsurer's announced goal of 104 percent combined ratio over the cycle remains challenging.
Furthermore, Moody's also argued that the company's equity exposure, while reduced, still remains high.
"These factors, coupled with prospects for restrained earnings during 2003, present a significant challenge to rebuild the capital base to historic levels in the short-to-medium term," the ratings agency said.
Regarding the group's U.S. unit, American Re, Moody's cited its capital position and also asbestos exposures--and said these concerns are heightened by Munich Re's reduced ability to support American Re and its subsidiaries.
Moody's also expressed its concern that in 2002, American Re had seen a jump in reported asbestos losses, compared to the previous year.
Given recent asbestos reserve charges taken by primary insurers, "Moody's believes there is a possibility that American Re will need to strengthen asbestos reserves over the next few years," the rating agency observed.