Credit Opinion: Munich Reinsurance Company

Transcription

1 Credit Opinion: Munich Reinsurance Company Global Credit Research - 11 Jun 2015 Munich, Germany Ratings Category Rating Outlook Insurance Financial Strength Subordinate Junior Subordinate Moody's Rating STA Aa3 A2 (hyb) A3 (hyb) Contacts Analyst Phone Benjamin Serra/Paris Antonello Aquino/London Simon Harris/London Key Indicators Munich Reinsurance Company[1][2] As Reported (Euro Millions) Total Assets 272, , , , ,358 Total Shareholder's Equity 30,304 26,188 27,439 23,309 23,028 Net income (loss) attributable to common shareholders 3,153 3,304 3, ,422 Gross Premiums Written 48,848 51,060 51,969 49,452 45,541 Net Premiums Written 47,225 49,404 50,174 47,876 43,644 Moody's Adjusted Ratios High Risk Assets % Shareholder's Equity 66.8% 62.3% 51.2% 56.5% 58.3% Reinsurance Recoverable % Shareholder's Equity 15.7% 17.6% 18.1% 20.5% 20.3% Goodwill & Intangibles % Shareholder's Equity 40.6% 47.2% 44.7% 52.6% 52.5% Gross Underwriting Leverage 3.4x 3.7x 3.6x 4.1x 3.8x Return on avg. Capital (1 yr. avg ROC) 7.9% 8.7% 8.6% 2.0% 7.0% Sharpe Ratio of ROC (5 yr. avg) 245.0% 245.0% 221.8% NA NA Adv./(Fav.) Loss Dev. % Beg. Reserves (1 yr. avg) -2.8% -2.1% -2.2% -1.9% -1.6% Financial Leverage 17.3% 16.9% 19.0% 19.3% 23.2% Total Leverage 20.6% 20.6% 22.6% 22.2% 25.3% Earnings Coverage (1 yr.) 6.1x 7.2x 7.8x 1.3x 6.9x [1] Information based on IFRS financial statements as of Fiscal YE December 31 [2] Certain items may have been relabeled and/or reclassified for global consistency Opinion SUMMARY RATING RATIONALE Moody's Aa3 insurance financial strength rating of Munich Re is supported by its excellent business franchise with an extremely strong market position in global reinsurance, strong business diversification and capital adequacy, relatively conservative investment portfolio, together with conservative management practices. These strengths

2 are offset somewhat by the challenge of achieving its 15% cross-cycle RORAC (return on risk adjusted capital) target due to a low interest rate environment, the inherent volatility of its catastrophe exposed business, the underperformance of some its operations such as the international health business, the primary life insurance operations and, more recently, reserve strengthening in some legacy life reinsurance portfolios. Munich Re is both the main operating and holding company of the Munich Re Group which encompasses reinsurance (including specialty insurance), and primary insurance operations, the latter through the ERGO Insurance Group (ERGO) which is owned by Munich Re. At YE2014, Munich Re Group's business, the majority of which is conducted in Europe and North America, consisted of P&C and Life reinsurance (55%), primary insurance (34%) and international health (11%) lines - international health business is split 76% reinsurance, 24% primary. The largest business segments include P&C reinsurance (34%), Life reinsurance (21%) and Life & Health in Germany (20%). Credit Strengths Credit Strengths for Munich Reinsurance Company are: - one of the leading global reinsurers with an excellent business franchise and solid position in German primary insurance through ERGO; - strong business diversification; - conservative management practices and sophisticated capital management; - relatively conservative investment portfolio. Credit Challenges Credit challenges for the company are: - inherent volatility of catastrophe exposed business and long-tailed lines of business (including life reinsurance); - difficult trading environment; - pressure on ERGO's profitability and capital mainly due to a continued low interest rate environment; - underperformance of the international health business Rating Outlook The outlook is stable. What to Watch For: - further reinsurance pricing declines expected during 2015, especially amongst catastrophe exposed lines - potential evolution of asset portfolio against the current background of low interest rates - performance of the international health business - performance and market position of ERGO, especially in the life segment - potential further reserve strengthening in the US mortality and Australian disability reinsurance segments What Could Change the Rating - Up The following factors could put upward pressure on Munich Re's ratings: - sustained strong core earnings with return on capital of 12-14% over the underwriting cycle; - financial leverage in the mid- to high teens (15-20%) together with earnings coverage in the 9x-14x range. What Could Change the Rating - Down The following factors could put negative pressure on Munich Re's ratings:

3 - return on capital over the underwriting cycle below 6%; - financial leverage consistently above 25% and earnings coverage consistently below 6x; - reduction in shareholders' equity of more than 10% over a 12 month period due to catastrophe losses or poor operating results. Notching Considerations Munich Re is both the holding company and main operating company of the Munich Re Group. In line with our notching practice for reinsurance operating companies, we rate Munich Re's subordinated debt two notches lower than its insurance financial strength rating. DETAILED RATING CONSIDERATIONS Moody's rates Munich Re Aa3 for insurance financial strength which is in line with the adjusted rating indicated by the Moody's insurance financial strength rating scorecard. Insurance Financial Strength Rating The key factors currently influencing the rating and outlook are: MARKET POSITION, BRAND AND DISTRIBUTION: Aa - EXCELLENT REINSURANCE MARKET POSITION EXPECTED TO CONTINUE Munich Re is one of the leading global reinsurers with a stable franchise and Moody's views its reinsurance market position as excellent in both absolute and relative terms. Munich Re has a significant market share in P&C reinsurance, and the Group writes most of its business directly, frequently being the lead reinsurer on programmes. Munich Re is also the leading global life reinsurer by premium. Furthermore, Munich Re continues to enhance its franchise strength in the US P&C market via increasing its broker and niche insurance business with acquisitions a feature. The Group also writes primary insurance business. Via Ergo, it is a top three primary insurer in Germany with an estimated 2014 market share of around 4% in German life and 5% in German non-life. Overall, Munich Re's market position and brand is viewed as being consistent with that of a Aa-rated company. BUSINESS & GEOGRAPHIC DIVERSIFICATION: Aa - BUSINESS DIVERSIFICATION EXPECTED TO REMAIN STRONG, NOTWITHSTANDING ERGO's SIGNIFICANT INTEREST RATE RISK Overall, Moody's views the Group's business and geographic diversification as being consistent with that of a Aa rated company. Property constituted more than 20% and Casualty slightly below 20% of total reinsurance GPW at YE2014, with the main lines of business within the diverse non-life portfolio being: Fire (25%), Motor (21%) and Liability (15%). Furthermore, the Group writes a significant amount of Life & Health reinsurance business (44% of reinsurance GPW at YE2014, including international health reinsurance) which although not without risk, generally has a low correlation with P&C risks. In 2014, Munich Health (Global health reinsurance business plus non German primary health insurance business) was split 76% reinsurance, 24% primary insurance. In terms of geographic diversification, the Group's reinsurance segment in recent years has become more orientated towards North America (45%) and less towards Europe (30%), albeit we note that with the current negative US reinsurance rating environment, this trend is likely to gradually shift over the next two-three years, with continued growth in emerging markets also anticipated. The Group also has meaningful primary insurance operations, including international health business, albeit orientated towards life and health (71%) and German business (72%), with the diversification benefits brought by ERGO's foreign operations in some cases offset by the lower profitability of these operations. On average over the last five years, Munich Re's reinsurance business has contributed over 80% of Group earnings. Notably, ERGO brings significant interest rate risk which the Group continues to mitigate via increase of asset duration and swaptions, and opposite interest-rate sensitivities in primary and reinsurance mitigate sensitivity at the Group level. ASSET QUALITY: Aa - RELATIVELY CONSERVATIVE INVESTMENT PORTFOLIO ALBEIT SOME

4 INVESTMENT RE-RISKING OCCURRING Overall asset quality is viewed as excellent, with the Group having a relatively conservative investment portfolio. High risk invested assets (i.e. investments in equities, alternative investments, non-owner occupied real estate, affiliates, non-investment grade/unrated fixed-income securities) as a % of equity (which for all asset metrics includes Group free RfB and Terminal Bonuses) increased to 67% at YE2014 (YE2013: 62%) excluding equity derivatives. The gross equities exposure increased slightly, to 5.2% at YE2014 (YE2013: 4.8%) of invested assets, representing around 37% of shareholders' equity (YE2013: 34%). At YE2014, the proportion of fixedincome securities rated non investment grade and unrated also increased to around 14% of equity from 11% at YE2013. The credit quality of the fixed-income portfolio as at YE2014, which represents around 85% (including loans) of invested assets and around 77% of which is government/semi-government and Pfandbriefe/Covered bonds, is considered very good. Corporate bond holdings (excluding bank bonds), a relatively high 46% of which are rated Baa, are around 10% of the fixed income portfolio. With regard to other assets, at YE2014 the Group's reinsurance recoverables as a % of equity remained low at 16%. Goodwill and intangibles (including Deferred Acquisition Costs, DAC) as a % of equity were 41% at YE2014, down from 47% at YE2013, following some goodwill impairment (related to ERGO international business) and an increase in shareholders' equity. This ratio is relatively high, although this is mainly driven by life DAC (excluding total life DAC from the calculation would result in a figure of around 28%). Any potential depreciation of the DAC in the German life business would be partly offset through the profit sharing mechanism. CAPITAL ADEQUACY: Aa - STRONG, NOTWITHSTANDING MEANINGFUL SHARE BUY-BACKS AND DIVIDENDS. MUNICH RE IS CURRENTLY RUNNING ABOVE ITS OWN TARGET LEVEL OF CAPITALISATION Munich Re's overall capital adequacy is currently viewed as strong. The Group's gross and net natural catastrophe exposures at the 99.6% aggregate PML are within Moody's Aa parameters, and although gross underwriting leverage for the Group is towards the bottom end of Moody's A parameter, the YE2014 metric at 3.4x (YE2013: 3.7x), is inflated by the primary life business. The Group's YE2014 regulatory solvency position (Solvency I) of 308% is also high, and, more meaningfully, Munich Re's YE2014 economic risk capital coverage, based on the requirements of its internal risk model (175% of VaR 99.5%) remains high, at 138%, although it decreased from 153% at YE2013 due to the decrease in interest rates. Moody's notes that meaningful share buy-backs and dividends have been a consistent feature of Munich Re's capital management with around EUR17 billion returned to shareholders from , although this has been outweighed by net income in the same period, and Munich Re will buy back shares for another EUR1 billion by the 2016 AGM. We will continue to assess any share buy-back and dividend amounts in relation to the Group's bottom-line profitability and capitalisation. PROFITABILITY: A - HEALTHY PROFITABILITY, BUT TRADING ENVIRONMENT IS INCREASINGLY CHALLENGING Moody's currently views Munich Re's profitability as good. Return on capital (ROC) from averaged around 6.8%. Munich Re's results can be volatile, as evidenced by the Group's low ROC and reported return on risk adjusted capital (RORAC) of 2% and 3% respectively in 2011, a year heavily impacted by nat cat losses. Nonetheless, results' volatility, as measured by the Sharpe ratio of ROC at 245% (5-year average measure), is fully consistent with a A-score for profitability. The Group's combined ratio for its P&C reinsurance business averages 98% from , which although reduced, remains above Munich Re's previous cross-cycle target of around 96%.In the last three years, the Group, like its peers, benefited from relatively low nat cat losses. Going forward, we note that reinsurance pricing, especially for catastrophe business, is generally under pressure, and the Group also faces some profitability challenges posed by the low interest rate environment which is suppressing running investment yields. Furthermore, Moody's believes that ERGO's performance, especially in its life business, is currently some way below the Group's 15% over the cycle RORAC target and will remain under pressure in a low interest rate environment as a result of its guaranteed products. Nonetheless, we expect Munich Re's profitability to remain resilient and the Group's ROC to remain above 6% in the near term.

5 RESERVE ADEQUACY: A - RESERVE ADEQUACY EXPECTED TO REMAIN GOOD The YE2014 scorecard metric, which is within Moody's A parameter, is driven by a small reserve surplus position on average during (1.7% average release), and at YE2014 the Group reported further reserve releases of approximately EUR1.2 billion. Since 2008, Munich Re has consistently reported overall reserve surpluses totalling around EUR4.9 billion. Moody's notes that reserves at Munich Re America (formerly American Re) are exposed to US workers' compensation business and asbestos & environmental claims, and have required reserve strengthening in past years. However, we also note that the Group maintains a reserve margin above 5% to absorb unexpected volatility, Overall, we believe that Munich Re's reserve adequacy is consistent with that of an A rated company due to the inherent difficulty of reserve estimation in certain long-tail lines of business. FINANCIAL FLEXIBILITY: Aa - RELATIVELY LOW LEVERAGE, ALTHOUGH EARNINGS COVERAGE HAS BEEN A RELATIVE WEAKNESS Munich Re's adjusted financial leverage at YE2014 marginally increased to 17.3% (YE2013: 16.9%), reflecting an increase in underfunded pension obligation which Moody's includes within the leverage calculations. The Group's total leverage at YE2014 remained unchanged at 20.6% (YE2013: 20.6%). In 2014, the Group's earnings coverage declined to 6.1x from 7.2x in 2013 following the decline in profit before tax, partly driven by goodwill impairments, but the 5-year average ratio remains relatively stable at around 6x. Going forward, earnings coverage will remain constrained by pressures on Munich Re's earnings, arising notably from low interest rates and the reinsurance pricing environment, but we expect the earnings coverage to remain within the 6x-7x range. Moody's believes that Munich Re's access to capital markets is better than most European (re)insurers despite that access not being regularly utilised by the company, notwithstanding the hybrid issuances in 2011 and again in 2012, and overall financial flexibility is currently viewed as being consistent with that of an Aa-rated company. Rating Factors Munich Reinsurance Company[1][2] Financial Strength Rating Scorecard Aaa Aa A Baa Ba B Caa Score Adjusted Score Business Profile Aa Aa Market Position and Brand (20%) Aa Aa - Relative Market Share Ratio X - Business profile - reinsurance - direct X premiums % GPW (rating) Product Focus and Diversification (15%) Aa Aa - Business and Geographic Diversification X Financial Profile A Aa Asset Quality (10%) A Aa - High Risk Assets % Shareholder's Equity 66.8% - Reinsurance Recoverable % Shareholder's 15.7% Equity - Goodwill & Intangibles % Shareholder's 40.6% Equity Capital Adequacy A Aa - Gross Underwriting Leverage 3.4x - Gross Natural Catastrophe Exposure X - Net Natural Catastrophe Exposure X Profitability (10%) A A - Return on Capital (5 yr. avg) 6.8% - Sharpe Ratio of ROC (5 yr. avg) 245.0% Reserve Adequacy (10%) A A

6 - Adverse (favorable) development % Beg. -1.7% Reserves (7 yr. avg) Financial Flexibility (15%) A Aa - Financial Leverage 17.3% - Total Leverage 20.6% - Earnings Coverage (5 yr. avg) 5.8x Operating Envrionment Aaa - Aaa - A A Aggregate Profile Aa3 Aa3 [1] Information based on IFRS financial statements as of Fiscal YE December 31 [2] The Scorecard rating is an important component of the company's published rating, reflecting the stand-alone financial strength before other considerations (discussed above) are incorporated into the analysis This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN

7 WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody s Publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY S credit rating. If in doubt you should contact your financial or other professional adviser. For Japan only: MOODY'S Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of MOODY'S Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ

8 consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.