Munich Re's overall profitability and earnings diversification has improved significantly over the past couple of years, says S&P Global Ratings (S&P) which has raised to 'AA' from 'AA-' the long-term issuer credit and insurer financial strength ratings on the entities within the Munich Re group. The outlook is 'Stable'.
S&P’s base case indicates that Munich Re’s strong and well-diversified earnings will remain in line with 'AA' rated peers such as Allianz, Zurich, and Chubb for the next two years. The group switched to International Financial Reporting Standard 17 in 2023, and reported net income of EUR4.6bn ($5bn) and a return on equity (ROE) of 16.1%. Its combined ratio of 86.3% included consolidated results for Ergo Germany (its P&C reinsurance unit) and Ergo International. These strong results were backed by sound earnings in the first quarter of 2024, when the group reported net income of EUR2.1bn.
Munich Re's earnings diversification benefits from sound technical performance in all its major divisions.
These are P&C reinsurance, life reinsurance, global specialty insurance, and retail primary insurance (through Ergo). Ergo's earnings contribution has stabilised in the past few years and is gradually improving. Earnings from life reinsurance saw a significant improvement after 2020 and 2021 when the pandemic caused a drop in income.
Compared with most reinsurance peers, the Munich Re group therefore benefits from higher diversification and lower dependence on cyclical businesses such as short-tail P&C reinsurance.
Given that its life reinsurance and primary insurance business is less cyclical and less exposed to catastrophes, S&P anticipates that Munich Re would be more able to withstand large natural catastrophes or a softening P&C reinsurance market than its peers. For 2024-2025, S&P assumes consistent earnings contributions in a "normalised" natural catastrophe environment in which about 50% of net profits are generated outside P&C reinsurance.
Munich Re has proved its ability to harness the recent favourable market and pricing conditions for P&C reinsurance. Its high growth rates in recent years have exceeded those of most peers, which demonstrates its competitive strength. The group has increased gross written premium in P&C reinsurance by about 60% since 2019; in addition, during weaker reinsurance cycles, the group has been willing to shrink the book and give up business if it did not meet minimum return targets. S&P considers Munich Re well placed to post a net income of EUR4.5bn-eUR5.0bn, ROE above 14%, and a consolidated combined ratio of 84%-86% in 2024-2025.
In S&P’s base-case scenario, the global credit rating agency forecasts that about 14 percentage points of the P&C reinsurance business's combined ratio will stem from natural catastrophe and large losses caused by human activity.
At the same time, S&P expects about five percentage points to come from positive run-off results from loss reserves in the previous year. So far in 2024, natural catastrophes have included convective storms in the US, Hurricane Beryl, and floods in Europe, while loss events connected to human activity have included the Baltimore bridge collapse and the CrowdStrike outage. S&P assumes that losses from these events fall within Munich Re's large loss budget for this stage of the year.
Capital
In S&P’s view, capital management remains conservative.
In 2023, Munich Re's capital adequacy was above the 99.99% confidence level. S&P anticipates that the group will maintain very strong capital and earnings in 2024 and 2025, supported by capital adequacy comfortably above the 99.95% confidence level and a conservative approach to reserves. S&P also expects the group's sound earnings to enable it to finance its growth as well as capital repatriation via dividends and share buybacks.
Munich Re's Solvency II ratio remained high, at 273% after the first quarter of 2024, which compares well with peers.
S&P anticipates that the group's conservative balance sheet and strong reserving will enable it to cope well with challenges, such as social inflation and capital market volatility. That said, S&P considers that Munich Re's exposure to large tail risks, such as natural catastrophes, could lead to some capital and earnings volatility. These risks are partially offset by the group's extremely diversified portfolio, strong risk controls, and cautious reserving practices, in S&P’s view.
The ‘Stable’ outlook indicates that, in S&P’s view, the group is likely to preserve its excellent competitive position and conservative capital management over the next two years, supported by its strong and diversified earnings profile.