S&P Global Ratings has revised its outlooks for Munich Re and Swiss Re, affirming both reinsurers’ “AA-” issuer credit and financial strength ratings.
Munich Re’s outlook was revised to positive from stable on improving diversification, while Swiss Re’s outlook was revised to stable from negative on its continuing performance improvement.
“Munich Re is well placed to continue to leverage the favorable market environment for P&C reinsurance, as demonstrated by high growth rates that exceed those of most peers,” said S&P, explaining that the positive outlook for Munich Re 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….”
The group is expected to post a net income of about €4.0 billion-€4.5 billion ($4.4 billion -$4.9 billion), with a return on equity (ROE) of above 14% and a consolidated combined ratio of about 89%-91% in 2023 and 2024, the ratings agency added. (Combined ratios below 100 indicate an underwriting profit).
“Under our base case scenario, we take into account that about 14 percentage points of the P&C reinsurance business’ 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.” S&P said its forecast is based on International Financial Reporting Standard 17 (IFRS 17), which is used by most of the company’s European peers.
In the first half of 2023, Munich Re generated strong and well diversified earnings, backed by a reported net income of €2.4 billion, an annualized ROE of 16.9%, and combined ratios of 83.5%, 84.7%, and 91.6% in the property and casualty (P&C) reinsurance unit, ERGO Germany, and ERGO International, respectively, S&P affirmed.
“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,” said S&P, noting that its strong and improving underwriting performance in its various operations compares well with peers.
Swiss Re
S&P explained its revision of Swiss Re’s outlook to stable from negative by saying the group’s non-life underwriting performance has continued to improve in line with expectations, driven by management’s corrective actions in recent years and a significantly improved pricing environment.
The outlook also recognizes the strong underwriting results in the corporate solutions segment (combined ratio of 91% in first-half 2023) and property/casualty (P/C) reinsurance (94.7% during H1), as well as improving life and health (L/H) reinsurance results, mostly as a result of reduced COVID-19 mortality losses.
“With increasing investment income, we expect net incomes of over $2.8 billion and $3.0 billion for 2023 and 2024, respectively. These figures are likely to translate to a return on equity (ROE) of close to 20% for 2023 and 2024, which will be inflated in the coming years by the recent drop in shareholders’ equity.”
S&P expects that the P/C reinsurance segment will record profitability levels in line with peers over 2023-2025 when normalized for accounting differences. European peers report under IFRS 17 accounting standards, while Swiss Re reports under U.S. generally accepted accounting principles (GAAP.)
The group is expected to continue to benefit from the positive pricing momentum in the P/C reinsurance market, S&P said, adding that increases in P/C reinsurance rates will outpace the negative impact of inflation on its claims experience.
“The stable outlook reflects our view that Swiss Re will continue to improve its profitability metrics over the next 24 months. We believe the group should record a combined ratio below 95% in 2023-2024. Furthermore, we expect Swiss Re will maintain capital to at least our ‘AA’ benchmark over 2023-2024.”
Source: S&P Global Ratings
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