Munich Reinsurance Company

CREDIT OPINION Update Munich Reinsurance Company Update following Affirmation of the Ratings Summary Rating Rationale RATINGS Munich Reinsurance Company Domicile Germany Long Term Rating Aa3 Type Insurance Financial Strength Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Brandan Holmes 44-20-7772-1605 VP-Senior Analyst brandan.holmes@moodys.com Charles Isselin44-20-7772-5573 Pontet Associate Analyst charles.isselin-pontet@moodys.com Antonello Aquino 44-20-7772-1582 Associate Managing Director antonello.aquino@moodys.com Munich Re s Aa3 insurance financial strength (IFS) rating reflects its excellent business franchise and very strong market position in global reinsurance, its broad diversification across geographies and business lines, strong capital adequacy and relatively conservative investment portfolio, together with conservative management practices. These strengths are somewhat offset by the pressure on profitability due to challenging reinsurance pricing trends, along with the persistently low interest rate environment, the inherent volatility of the Group s catastrophe exposed business, and costs and execution risk associated with the restructuring of its ERGO primary insurance business. Munich Re is both the main operating and holding company of the Munich Re Group which encompasses reinsurance (including specialty insurance), and primary insurance operations, the latter through the ERGO Insurance Group (ERGO) which is owned by Munich Re. In the first 9 months of 2016, Munich Re Group's business, the majority of which is conducted in Europe and North America, consisted of P&C and Life reinsurance (57%), primary insurance (33%) and international health (10%) lines - international health business is split c.77% reinsurance, c.23% primary. The largest business segments include P&C reinsurance (37%), Life reinsurance (20%) and Life & Health in Germany (19%). Credit Strengths One of the leading global reinsurers with an excellent business franchise and solid position in German primary insurance through ERGO Strong business diversification Conservative management practices and sophisticated capital management Relatively conservative investment portfolio Credit Challenges Inherent volatility of catastrophe exposed business and long-tailed lines of business (including life reinsurance) Difficult trading environment Pressure on ERGO's profitability and capital mainly due to a continued low interest rate environment

Rating Outlook The outlook is stable. What to Watch For: Continued softening of reinsurance prices during 2017, and the impact on Munich Re s profitability and market share Performance and market position of ERGO, especially in the life segment Progress against plans for ERGO s restructuring, specifically with respect to cost and timeline estimates Potential evolution of asset portfolio against the current background of low interest rates Volatility in the group s Solvency II ratio and its sensitivity to interest rate changes Factors that Could Lead to an Upgrade Sustained strong core earnings with return on capital above 12% over the underwriting cycle Financial and total leverage consistently below 20%, together with earnings coverage over 10x through the cycle Material improvement in the business environment, including P&C reinsurance pricing and interest rates Factors that Could Lead to a Downgrade Return on capital over the underwriting cycle below 6%, or a sharp increase in volatility of the returns Financial leverage consistently above 25% and earnings coverage consistently below 6x Material deterioration in the group s risk profile, for example following rapid growth in volatile or risky business Meaningful and sustained adverse reserve development Reduction in shareholders' equity of more than 10% over a 12 month period due to catastrophe losses or poor operating results This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2

Key Indicators Exhibit 1 Source: Company reports and Moody's Investors Service Notching Considerations Munich Re is both the holding company and main operating company of the Munich Re Group. In line with our notching practice for reinsurance operating companies, we rate Munich Re's subordinated debt two notches lower than its insurance financial strength rating. Detailed Rating Considerations MARKET POSITION, BRAND AND DISTRIBUTION: Aa - EXCELLENT REINSURANCE MARKET POSITION EXPECTED TO CONTINUE Munich Re is one of the leading global reinsurers with a stable franchise and Moody's views its reinsurance market position as excellent in both absolute and relative terms. Munich Re has a significant market share in P&C reinsurance, and the Group writes most of its business directly, frequently being the lead reinsurer on programmes. Munich Re is also the leading global life reinsurer by premium. Furthermore, Munich Re continues to enhance its franchise strength in the US P&C market via increasing its broker and niche insurance business. The Group also writes primary insurance business. Via ERGO, it is a top three primary insurer in Germany with an estimated 2015 market share of around 4% in German life and 5% in German non-life. Overall, Munich Re's market position and brand is viewed as being consistent with that of a Aa-rated company. BUSINESS & GEOGRAPHIC DIVERSIFICATION: Aa - BUSINESS DIVERSIFICATION EXPECTED TO REMAIN STRONG, NOTWITHSTANDING ERGO's SIGNIFICANT INTEREST RATE RISK Overall, Moody's views the Group's business and geographic diversification as being consistent with that of a Aa rated company. Property constituted more than 20% and Casualty slightly above 20% of total reinsurance GPW at YE2015, with the main lines 3

of business within the diverse non-life portfolio being: Fire (24%), Motor (21%) and Liability (16%). Furthermore, the Group writes a significant amount of Life & Health reinsurance business (46% of reinsurance GPW at YE2015, including international health reinsurance) which although not without risk, generally has a low correlation with P&C risks. In 2015, Munich Health (Global health reinsurance business plus non German primary health insurance business) was split 77% reinsurance, 23% primary insurance. In terms of geographic diversification, the Group's reinsurance segment in recent years has become more orientated towards North America (49%) and less towards Europe (29%), with continued growth in emerging markets also anticipated. The Group also has meaningful primary insurance operations, including international health business, albeit orientated towards life and health, and German business (76%), with the diversification benefits brought by ERGO's foreign operations in some cases offset by the lower profitability of these operations. On average over the last five years, Munich Re's reinsurance business has contributed over 80% of Group earnings. Notably, ERGO brings significant interest rate risk which the Group continues to mitigate via increase of asset duration and swaptions, and opposite interest-rate sensitivities in primary and reinsurance mitigate sensitivity at the Group level. ASSET QUALITY: Aa - RELATIVELY CONSERVATIVE INVESTMENT PORTFOLIO ALBEIT SOME INVESTMENT RE-RISKING OCCURRING Overall asset quality is viewed as very good, with the Group having a relatively conservative investment portfolio. High risk invested assets (HRA, i.e. investments in equities alternative investments, non-owner occupied real estate, affiliates, non-investment grade/ unrated fixed-income securities) as a % of equity (which for all asset metrics includes Group free RfB and Terminal Bonuses) increased to a relatively high 71% at YE2015 (YE2014: 67%) excluding equity derivatives. Munich Re's level of HRA relative to shareholders' equity is somewhat elevated relative to its peers, however this is mainly due to inclusion of its primary life insurance operation, which inherently has higher asset leverage than a typical reinsurance balance sheet. Adjusting for the primary insurance business, we estimate that Munich Re's ratio of HRA to equity would be closer to 50%. The gross equities exposure remained stable at 5.2% at YE2015 (YE2014: 5.2%) of invested assets, representing around 35% of shareholders' equity (YE2014: 37%). At YE2015, the proportion of fixed-income securities rated non-investment grade and unrated also increased to around 18% of equity from 14% at YE2014. The credit quality of the fixed-income portfolio as at YE2015, which represents around 84% (including loans) of invested assets and 77% of which is government/semi-government and Pfandbriefe/ Covered bonds, is considered very good. Corporate bond holdings (excluding bank bonds), a relatively high 48% of which are rated Baa, are 10% of the fixed income portfolio. With regard to other assets, at YE2015 the Group's reinsurance recoverables as a % of equity remained low at 12.5%. Goodwill and intangibles (including Deferred Acquisition Costs, DAC) as a % of equity were 39% at YE2015, slightly down from 41% at YE2014, following some goodwill impairment (related to ERGO international business) and an increase in shareholders' equity. This ratio is relatively high, although this is mainly driven by life DAC (excluding total life DAC from the calculation would result in a figure of around 27%). Any potential depreciation of the DAC in the German life business would be partly offset through the profit sharing mechanism. CAPITAL ADEQUACY: Aa STRONG, NOTWITHSTANDING MEANINGFUL SHARE BUY-BACKS AND DIVIDENDS. MUNICH RE IS CURRENTLY RUNNING ABOVE ITS OWN TARGET LEVEL OF CAPITALISATION Munich Re's overall capital adequacy is currently viewed as strong. Capital adequacy is strong, with solid levels of regulatory and economic capital, and moderate modelled nat-cat exposures compared to its reinsurance peers. While regulatory capital, as measured by the group s Solvency II ratio, is robust at a level of between 250% to 260% at H1 2016 (302% at year-end 2015), it has been somewhat volatile, in part due to the group s significant interest rate exposure in its ERGO primary life insurance business. The group also benefits from a very high quality capital base, with approximately 90% of its eligible own funds being classified as Tier 1 capital. The Group's gross and net natural catastrophe exposures at the 99.6% aggregate PML are within Moody's Aa parameters, and although gross underwriting leverage for the Group is towards the bottom end of Moody's A parameter, the YE2015 metric at 3.5x (YE2014: 4

3.4x), is inflated by the primary life business. Moody's notes that meaningful share buy-backs and dividends have been a consistent feature of Munich Re's capital management with around EUR 19 billion returned to shareholders from 2006-2015, although this has been outweighed by net income in the same period, and Munich Re will buy back shares for another EUR 1bn by the 2017 AGM. During the first 9 months of 2016, share buybacks have equated to EUR 0.7bn (EUR 1.0bn during 2015). PROFITABILITY: A - HEALTHY PROFITABILITY, BUT TRADING ENVIRONMENT IS INCREASINGLY CHALLENGING Moody s considers Munich Re s profitability to be solid with an average return on capital of 7.0% over the past five years through 2015, although it has been volatile at times given its meaningful cat-exposed property portfolio. Despite the group s excellent franchise, it has not been fully insulated from the impact of softening reinsurance prices - over the past four years, return on capital has declined from 8.7% in 2012 to 7.5% in 2015, largely driven by deterioration in underwriting profitability, but also lower investment income.. The Group's P&C reinsurance combined ratio for 9m 2016 was 93.7% (2015: 89.7%), increasing to 99.9% when normalising for nat cat and favourable reserve development. On a reported basis, this is slightly below the 96% average combined ratio from 2011 to 2015. Over the past four years, Munich Re, like its peers, benefited from relatively low nat cat losses, which has offset some of the pressure of reinsurance price softening. We expect reinsurance prices to continue softening over the next year, albeit at a slower pace. Continued price softening is likely to have a negative impact on Munich Re s profitability, even though Munich Re s market position enable it to make less price concessions than the industry average. In addition, weaker performance by ERGO, along with its restructuring and strategic repositioning are expected to dampen group profitability over the medium term. Earlier this year, the group announced a significant restructuring initiative at ERGO, that seeks to position it as a more efficient and modern global international insurer. The restructuring is expected to cost approximately EUR1 billion until 2020, after which the group expects ERGO to be in a position to contribute approximately EUR500 million to annual net profit. While we expect ERGO s profitability will improve over the medium term, as a result of the restructuring, meaningful execution risk exists, particularly in the significant technology overhaul that will form the backbone of the restructuring efforts. Nonetheless, we expect Munich Re's profitability to remain resilient and the Group's ROC to remain above 6% in the near term. Exhibit 2 Munich Re's Net Income and Return on Capital Source: Company reports and Moody's Investors Service RESERVE ADEQUACY: A - RESERVE ADEQUACY EXPECTED TO REMAIN GOOD The YE2015 scorecard metric, which is within Moody's A parameter, is driven by a small reserve surplus position on average during 2009-2015 (2.1% average release), and at YE2015 the Group reported further reserve releases of approximately EUR1.4 billion. Since 5

2008, Munich Re has consistently reported overall reserve surpluses totaling around EUR6.5 billion. Moody's notes that reserves at Munich Re America (formerly American Re) are exposed to US workers' compensation business and asbestos & environmental claims, and have required reserve strengthening in past years. Overall, we believe that Munich Re's reserve adequacy is consistent with that of an A rated company due to the inherent difficulty of reserve estimation in certain long-tail lines of business. FINANCIAL FLEXIBILITY: Aa - RELATIVELY LOW LEVERAGE, ALTHOUGH EARNINGS COVERAGE HAS BEEN A RELATIVE WEAKNESS Munich Re's adjusted financial leverage at YE2015 marginally increased to 16.1% (YE2014: 16.3%), reflecting an increase in underfunded pension obligation which Moody's includes within the leverage calculations. The Group's total leverage at YE2015 reduced slightly to 19.3% (YE2014: 20.2%). In 2015, the Group's earnings coverage improved to 9.1x from 7.2x in 2014, however the 5-year average ratio remains relatively stable around 6.5x. Going forward, earnings coverage will remain constrained by pressures on Munich Re's earnings, arising notably from low interest rates and the reinsurance pricing environment, but we expect the earnings coverage to remain within the 6x-7x range. Moody's believes that Munich Re's access to capital markets is better than most European (re)insurers despite that access not being regularly utilised by the company, notwithstanding the hybrid issuances in 2011 and again in 2012, and overall financial flexibility is currently viewed as being consistent with that of an Aa-rated company. Exhibit 3 Financial Flexibility Source: Company reports and Moody's Investors Service 6

Rating Methodology and Scorecard Factors Exhibit 4 Source: Company reports and Moody's Investors Service Ratings Exhibit 5 Category MUNICH REINSURANCE COMPANY Rating Outlook Insurance Financial Strength Subordinate Junior Subordinate Moody's Rating STA Aa3 A2 (hyb) A3 (hyb) Source: Moody's Investors Service 7

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