S&P Global Ratings expects reinsurance giant Munich Re to maintain its capital adequacy in 2020 and 2021, despite the firm withdrawing its profit guidance for the current year in light of the ongoing COVID-19 pandemic.
Prior to the coronavirus pandemic, the reinsurer expected to achieve profit for 2020 of €2.8 billion. However, at the start of the month, Munich Re said that it would not attain its guidance level for the full-year amid the impacts of the outbreak.
Specifically, Munich Re highlighted that during the first-quarter of the year, its property / casualty reinsurance division experienced considerable claims burden from losses related to the pandemic, the majority of the expenditure coming from the cancellation and postponement of large events.
As a result, the company said that it expects to record profits in the low three-digit million euro range for the first three months of 2020, against profit of €633 million for the same period in 2019.
As well as the hit to its underwriting performance in the quarter, analysts at S&P note that like its peers, Munich Re was also exposed to capital markets volatility and significant declines in equity share prices through the first-quarter as a result of COVID-19.
“Nevertheless, we expect Munich Re’s capital adequacy will stay in line with our expectations,” says the ratings agency. Based on S&P’s risk-based model, Munich Re’s capital adequacy is expected to stay above the ‘AA’ level over 2020 and 2021.
One of the supporting factors, notes S&P, is the fact Munich Re has discontinued its previously announced 2020/2021 share buy-back programme. This was announced by the firm at the same time as the profit guidance withdrawal, with the reinsurer explaining that this will be the case until there is greater understanding around the actual claims burdens arising from COVID-19.
“Moreover, the group’s solvency ratio will likely remain comfortably within its target capital range of 175%-220%,” continues S&P. Adding, “We therefore believe that the group continues to be sufficiently capitalized to cope with further market volatility and possible large man-made losses or natural catastrophe events to which the group remains exposed.”
For Munich Re and many other global reinsurers, it’s likely that 2020 earnings will take a hit from the current crisis. In 2021, analysts state that the reinsurer is well placed to recover net income to around €2.6 billion – €2.8 billion, with a return on equity of between 8% and 9%.
