While S&P Global Ratings expects Munich Re’s performance to decline in 2020 due to COVID-19, sufficient capital means the reinsurer will be able to defend its ‘extremely strong competitive position’ over the next 12-24 months.
This capital position is supported by retained earnings and the temporary suspension of Munich Re’s €1 billion share buyback program.
Moreover, the group’s solvency ratio will likely remain comfortably within its target capital range of 175%-220% in 2020, following a decline to 212% in first-quarter 2020 from 237% at year-end 2019.
Accordingly, the ratings agency has affirmed Munich Re’s ‘AA-‘ Rating; Outlook Stable.
However, Munich Re does faces losses on its property and casualty reinsurance business and is expected to be hit by a deterioration of capital markets.
S&P forecasts a combined ratio of about 103% and a return on equity of 3%-6% for year-end 2020, thanks to earnings diversification through primary and life/health reinsurance business.
Furthermore, there’s an expectation for a a recovery in earnings during 2021 with the combined ratio at 96%-98% and the ROE at 8%-10%, assuming that Munich Re’s risk-based capital will remain above the ‘AA’ confidence level in 2020-2022.
Although unlikely over the next 24 months, S&P might consider raising the rating if it saw a more favorable long-term pricing environment for P&C reinsurance lines.
An upgrade would also hinge on the group’s ability to further diversify its earning streams, with a sustainable and sizable contribution from its primary insurance operations.