Munich Re, the world's largest reinsurer, yesterday bowed to pressure to shore up its balance sheet and unveiled a €3.8bn (£2.6bn) rights issue.
The company's debt has been downgraded four times in a year and its creditworthiness had fallen sharply below its main rivals, raising fears it could struggle to expand or even retain business when policies are up for renewal in the New Year.
News of the two-for-seven rights issue, which will be priced later this month at a discount of up to 24 per cent below the current share price, cooled a public spat between Munich Re and the credit rating agency, Standard & Poor's. The last debt downgrade by S&P in August had been branded as "unjustified" by Hans-Jurgen Schinzler, Munich's chief executive, but yesterday S&P agreed that the company was on course to regain its AA rating by the end of next year.
Stephen Searby, credit analyst at S&P, said: "The capital raising underlines the very strong financial flexibility enjoyed by the group and supports Munich Re's long-term strategy."
The new cash will not immediately push Munich back above its current A+ rating since it will be used to back new business. S&P is also demanding more evidence that it has shrugged off its historically poor underwriting performance.
Munich shares regained most of their early losses and Mr Schinzler said: "The expectation of a capital increase has been reflected in the share price, so of course it has been a certain incitement for us to take some insecurity out of the market. It is also surely good to calm our customers, too, ahead of the upcoming insurance contract renewals."
Observers said Munich - increasingly under the influence of its reformist chief executive designate, Nikolaus von Bomhardt - would need to liquidate some of its shareholdings in other German financial institutions to raise extra capital.
The rights issue is being used as an opportunity to unwind some of the cross-holdings between financial institutions that have worried rating agencies who argue that they increase the risk of a systemic crisis in the German financial system. Allianz, the insurer that has a 13.6 per cent stake in Munich, said it would cut its holding by subscribing to just half the rights issue shares to which it is entitled.
HVB, the German bank that acts as a distributor for many Munich products, will subscribe to the full entitlement under its 13.2 per cent shareholding and is also part of a consortium of banks underwriting the rights issue. However, it said it remained committed to unwinding its cross-holding in the long term.
Munich's fundraising is the latest in a string of rights issues by European insurers fighting to rebuild balance sheets after the three-year bear market wiped billions from the capital reserves which back their policies and allow them to write new business while premiums are sky-high. Earlier this week, the UK group Royal & SunAlliance raised £960m in a fully underwritten rights issue, and Allianz raised €4.4bn in April.