S&P Global Ratings has affirmed its ‘AA-‘ issuer credit and insurer financial strength ratings on Munich Re, revising its outlook to positive from stable, citing the German reinsurer’s ability to defend its excellent competitive position and conservative capital management via further earnings diversification by divisions.
Referring to Munich Re’s H1 results, S&P said the reinsurer generated “strong and well-diversified” earnings, backed by a reported net income of €2.4 billion, an annualised ROE of 16.9%, and combined ratios of 83.5%, 84.7%, and 91.6% in the P&C reinsurance unit, ERGO Germany, and ERGO International, respectively.
S&P added that Munich Re’s earnings diversification has benefited from sound technical performance in all major divisions, namely P&C reinsurance, Global Specialty, its retail primary insurance arm ERGO, and life reinsurance.
S&P wrote, “ERGO’s earnings contribution has stabilized in the past few years and is gradually improving. Life reinsurance has also improved significantly after a COVID-19-related drop in income in 2020 and 2021.
“The group, therefore, benefits from greater diversification and lower dependence on cyclical business, such as short-tail P&C reinsurance, compared with most reinsurance peers.”
The rating agency thus stated that Munich Re is well placed to continue to leverage the favorable market environment for P&C reinsurance, and that it will benefit from a gradual rise in investment income, due to increasing interest rates.
S&P continued, “We think Munich Re is well placed to post a net income of about €4.0 billion-€4.5 billion in 2023 and 2024, with an ROE of above 14% and a consolidated combined ratio of about 89%-91% in 2023 and 2024.
“Under our base case scenario, we take into account that about 14 percentage points of the P&C reinsurance business’s combined ratio stem from natural catastrophe and manmade large losses, while about 5 percentage points are positive run-off results from prior year loss reserves. This forecast is based on IFRS 17 accounting standards.”
In 2022, Munich Re’s capital adequacy remained in line with S&P’s ‘AA’ base case assumptions, according to its risk-based capital model. This was despite the sharp increase in interest rates, related declines in asset value reserves of fixed income securities, and capital consumption due to strong growth rates of the underlying business.
The rating agency noted that Munich Re’s Solvency II ratio also remained high at 273% in H1, comparing well with peers.
S&P went on, “We anticipate that the group will cope well with current challenges, such as high inflation and capital market volatility, based on its conservative balance sheet and strong reserving. We think this will enable the group to maintain capitalization at least at ‘AA’ confidence levels over the next two years, based on our risk-based capital model.
“We think Munich Re is exposed to large tail risks, such as natural catastrophes, which could lead to some capital and earnings volatility. However, the group’s extremely diversified portfolio, strong risk controls, and cautious reserving practices offset these risks, in our view.”
The rating agency said that the positive outlook reflects its view that the group “will defend its excellent competitive position and conservative capital management over the next two years via further earnings diversification by divisions and improvements, with an ROE of above 14% in 2023 and 2024.”
S&P observed that it could revise the outlook to stable in the next two years if Munich Re appeared “likely to perform below our expectations or below higher-rated peers, or if its risk-based capital adequacy declined and stayed below the ‘AA’ level for a long period.”
This could occur following materially higher investment charges or significant unexpected losses from large natural catastrophes, S&P explained.
“We could upgrade the ratings by one notch in the next two years if Munich Re continued to demonstrate a strong operating performance that compares well with higher-rated peers and if it benefited from continued diversification from its various operations,” the rating agency concluded.
