31st May 2020

S&P Global affirms Munich Re rating
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S&P Global Ratings has affirmed its 'AA-' long-term issuer credit and financial strength ratings on Munich Re's core, highly strategic, and guaranteed subsidiaries.
The rating agency comments "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 restrictions related to the COVID-19 pandemic. This resulted in significantly weaker results for the first quarter of 2020: E221m in net profit compared with E633m for the same period in 2019.
As a result, we have revised down our earnings projections for the group in our base case scenario. We now expect a combined(loss and expense) ratio of about 103 for 2020, assuming a normal level of natural catastrophe losses and average reserve releases of about 4% of premiums. We expect the group to report an ROE of 3%-6%, supported by its primary operations, life and health reinsurance business, and investment income-albeit at lower levels due to the recessionary environment. For 2021, we expect the group's combined ratio and ROE to improve to 96%-98 and 8%-10% respectively.
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 E1bn share buyback program. Moreover, the group's solvency ratio will likely remain comfortably within its target capital range of 175%-220% in 2020, following a decline to 212% in first-quarter 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 stable outlook reflects our view that the Munich Re group can maintain capital adequacy above the 'AA' level over 2020-2022, improve earnings in 2021-2022, and defend its excellent competitive position during the next 12-24 months through:
-Moderate price increases in the global P&C reinsurance business in 2020;
-Further optimising 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.
We might consider a negative rating action over the next two years if the group is likely to perform well below our expectations and its risk-based capital adequacy declines and stays below the 'AA' level for a long period. This could occur as a result of materially higher investment charges, significant exposure to COVID-19-related claims, or large natural catastrophes.
Although unlikely over the next 24 months, we might consider raising the rating if we saw a more favourable long-term pricing environment for P&C reinsurance lines. 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.

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