S&P upgrades outlook for Munich and Swiss Re on back of hardening market and better primary results

S&P has upgraded its ratings outlook for Munich Re and Swiss Re on the back of improving performance buoyed by the hardening reinsurance market and stronger results in their primary units. Swiss Re’s outlook has been revised to stable from negative with its ‘AA-’ ratings affirmed. Munich Re’s outlook has moved from stable to positive with its ratings also affirmed. S&P said Swiss Re’s non-life underwriting performance has continued to improve in line with expectations, driven by corrective actions in recent years and a “significantly improved” pricing environment. It expects Swiss Re to continue to benefit from the positive pricing momentum in the P&C reinsurance market and thinks rate increases will outpace the negative impact of inflation on claims experience. “The outlook revision to stable reflects improvements in Swiss Re’s underwriting performance since 2021 and our expectation of more to come in 2023-2024. It also recognises 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%), and the improvement in life and health (L/H) reinsurance results, mostly reflecting reduced Covid-19 mortality losses,” it said. “Our base case is that, in conjunction with its strongly performing corporate solutions segment, the group should record combined ratios below 95% in 2023-2024,” added the ratings agency. “With increasing investment income, we expect net incomes of over $2.8bn and $3.0bn 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,” said S&P. It believes Swiss Re will maintain capital to at least its ‘AA’ benchmark over 2023 to 2024. But S&P stressed that positive rating action is unlikely over the next 24 months. “Any upside to the rating would rely on capital improving to above our ‘AAA’ level at the same time as the group outperforming its peer group,” it said. The ratings agency said it would take negative rating action on Swiss Re over the next 24 months if the group cannot maintain profitability levels in line with its closest peers or if S&P believe capital levels will fall consistently below the ‘AA’ level. S&P said Munich Re is well placed to continue to leverage the favourable P&C reinsurance market conditions, after delivering high growth rates that exceed those of most peers. It expects the group to post a net income of about €4bn to €4.5bn in 2023 and 2024, with a return on equity above 14% and a consolidated combined ratio of about 89% to 91%. S&P also said that Munich Re’s earnings diversification has improved “significantly” in the past couple of years, with better performance from its primary insurance units. “In the first half of 2023, Munich Re generated strong and well diversified earnings, backed by a reported net income of €2.4bn, an annualised 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,” it said. “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. ERGO’s earnings contribution has stabilised 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,” it added. S&P has therefore revised Munich Re’s outlook to positive from stable and affirmed its ‘AA-’ issuer credit and insurer financial strength ratings. “The positive outlook reflects our view that the group will defend its excellent competitive position and conservative capital management via further earnings diversification by divisions,” said S&P. The ratings agency said it would 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.

S&P upgrades outlook for Munich and Swiss Re on back of hardening market and better primary results

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