S&P Affirms Munich Re’s ‘AA-‘ Ratings, Reflecting Sufficient Capital for COVID-19 Crisis

May 29, 2020

S&P Global Ratings has affirmed its “AA-” long-term issuer credit and financial strength ratings for Munich Re and its subsidiaries, with a stable outlook.

The stable outlook reflects S&P’s view that Munich Re will maintain capital adequacy above the “AA” confidence level in 2020-2022, improve earnings in 2021-2022, and “defend its extremely strong competitive position during the next 12-24 months.”

The group’s P&C reinsurance segment suffered from a higher-than-expected claims burden due to the cancellation and postponement of large events amid the global lockdowns related to the COVID-19 pandemic. S&P said these payouts resulted in significantly weaker results for the first quarter of 2020: €221 million (US$243.9 million) in net profit compared with €633 million (US$698.7 million) for the same period in 2019.

As a result, S&P has revised down Munich Re’s earnings projections with the expectation that the reinsurer will report a combined (loss and expense) ratio of about 103% for 2020. S&P said this assumes “a normal level of natural catastrophe losses and average reserve releases of about 4% of premiums.” (Editor’s note: Combined ratios below 100% indicate an underwriting profit).

Further, S&P predicted the group would report a ROE of 3%-6% during 2020, which would rise to 8%-10% for 2021, while its 2021 combined ratio is projected to improve to 96%-98%.

“We expect the company’s capital adequacy, based on our risk-based model, to remain above the ‘AA’ confidence level in 2020-2022, supported by retained earnings and the temporary suspension of Munich Re’s €1 billion share buyback program,” said S&P.

In addition, S&P said, Munich Re’s solvency ratio will likely remain comfortably within its target capital range of 175%-220% in 2020, following a decline to 212% in the first quarter of 2020 from 237% at year-end 2019.

“We therefore believe the group remains sufficiently capitalized to cope with further market volatility and possible large man-made losses or natural catastrophe events to which it remains exposed,” the ratings agency continued.

S&P said that the Munich Re’s stable outlook reflects its ability to maintain capital adequacy above the “AA” level, improve earnings and defend its competitive position during the next 12-24 months via:

  • Moderate price increases in the global P&C reinsurance business in 2020;
  • Further optimizing growth opportunities, demonstrating its ability to adapt to the operating conditions resulting from the pandemic; and
  • Capturing increasing earnings potential from its primary insurance operations.

S&P said it would consider a negative rating action over the next two years if the group performs well below expectations and its risk-based capital adequacy declines and stays below the “AA” level for a long period. Such conditions could occur with higher investment charges, significant exposure to COVID-19-related claims, or large natural catastrophes, said S&P.

S&P said it would consider raising Munich Re’s “AA-” rating if there was “a more favorable long-term pricing environment for P&C reinsurance lines,” although this is unlikely over the next 24 months. “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,” the ratings agency continued.

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