Munich Reinsurance Co.

Transcription

1 Primary Credit Analyst: Volker Kudszus, Frankfurt (49) ; Secondary Contact: Johannes Bender, Frankfurt (49) ; Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Accounting Considerations Related Criteria And Research MAY 31,

2 SACP* Assessments SACP* Support Ratings Anchor aa- + Modifiers 0 = aa- + 0 = Business Risk Very Strong ERM and Management 0 Liquidity 0 Group Support 0 Financial Risk Very Strong Holistic Analysis 0 Sovereign Risk 0 Gov't Support 0 *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Very Strong Global market-leading position in non-life and life reinsurance, along with a strong presence in primary insurance. Very strong global brand, underwriting, and distribution expertise. Extremely strong diversification by regions and lines of business, safeguarding the group from adverse development in specific segments or regions. Primary insurance operation (ERGO insurance group) with a relatively weaker competitive position and earnings contribution. Strategic update in 2016 likely to impact ERGO's earnings contribution. Financial Risk Profile: Very Strong Extremely strong capital adequacy accompanied by very strong reserve adequacy. Moderate risk position, reflecting potential capital and earnings volatility from non-life reinsurance natural catastrophe exposure and interest exposure from primary life insurance operations. Strong financial flexibility on back of proven capital market track record. Other Factors Very strong enterprise risk management (ERM) and good economic capital model (ECM) assessment. On May 18, 2016, we lowered the outlook on ERGO Lebensversicherung AG (ERGO Leben), the main primary life insurance carrier of the ERGO group, to negative from stable, on back of concerns that ERGO Leben might not be able to demonstrate an operating performance in line with the performance targets set by its parent, Munich Re, over the next two years, in the low-interest-rate environment. MAY 31,

3 Factors Specific to the Holding Company The 'A' rating on ERGO Group AG and the 'A-' rating on Munich Re America Corp. reflect their status of intermediate, non-operating holdings within the group. The wider notching for Munich Re America Corp. reflects our view of the higher structural subordination within insurance groups in the U.S. compared to outside the U.S. Outlook: Stable S&P Global Ratings' stable outlook on Germany-based global reinsurance group Munich Reinsurance Co. and its related entities (collectively Munich Re) incorporates our expectation that Munich Re will sustain its extremely strong competitive position and maintain its very strong financial risk profile. Downside scenario We regard the possibility of a downgrade as remote over the next months. However, we might consider a negative action if Munich Re's capital adequacy fell below the 'AA' level in our capital model over a prolonged period. This could occur, for example, as a result of a combination of higher investment charges, unexpectedly large natural catastrophes or other large claims events, and prolonged weakened earnings well below our base-case assumptions. Upside scenario We do not expect to raise the ratings over the next months, mainly owing to the softening in the property/casualty (P/C) reinsurance sector and ongoing low interest rates. However, we would consider such an action if we were to revise upward our assessment of the group's business risk profile. This could be triggered by a more stable and favorable pricing environment in P/C reinsurance and a stronger, or significant and sustainable earnings contribution from the primary insurance business. Base-Case Scenario Macroeconomic Assumptions Moderate, global economic growth and inflation of 3.3% and 3.7% in 2016 and Long-term risk-free rates in the eurozone, U.S., and APAC to remain at 1.0%, 2.3%, 5.4% in 2016 and 1.5%, 2.9%, 5.4% respectively in MAY 31,

4 Company-Specific Assumptions Extremely strong competitive position and ongoing financial discipline in P/C reinsurance underwriting with gross written premiums (GWP) of about 45 billion- 48 billion. Return on investment declining by basis points per year over P/C reinsurance combined, cost and claims, ratio of about 95%-97%, including about 12 percentage points for natural catastrophe and man-made losses and about 6 percentage points for run-off results in Capital adequacy staying at the 'AAA' level in Contribution from Munich Re's primary insurance operations being affected by the strategic update with potential restructuring charges, which could result in no profit contribution in Net income of about 2.2 billion- 2.6 billion in 2016 and 2.1 billion- 2.5 billion in Financial leverage of below 15% and fixed-charge coverage of above 10x. Key Metrics --Year ended Dec (Mil. EUR) 2017* 2016* Gross premiums written ~45,000-48,000 ~45,000-48,000 50,374 48,848 51,060 Net income (attributable to all shareholders) ~2,100-2,500 ~2,200-2,600 3,122 3,170 3,333 Return on shareholders' equity (reported) (%) >8 > P/C reinsurance: Net combined ratio (%) ~95-97 ~ Net investment yield (%) ~2.8 ~ S&P Global Ratings capital adequacy Extremely strong Extremely strong Extremely strong Extremely strong Extremely strong Fixed-charge coverage (x) >10 > Financial leverage (%) <15 < *Forecast data, reflecting S&P Global Ratings base-case scenario. P/C--Property/casualty. Company Description Munich Re is a global reinsurance group offering life and P/C reinsurance. Besides its market leading position in reinsurance, it owns a sizable primary insurance operation, ERGO, with some focus on Germany. In 2015, non-life reinsurance contributed 17.7 billion or 35% of GWPs, life reinsurance 10.5 billion or 21%, ERGO Life and Health Germany 9.4 billion or 19%, Munich Health 5.6 billion or 11%, ERGO International 3.9 billion or 8%, and ERGO P/C Germany 3.2 billion or 6%. With regards to 2015 earnings contribution, the combined reinsurance segment has been the main positive contributor with 3.3 billion, Munich Health has been positive on a smaller scale with 0.1 billion, and the ERGO segment reported a loss of 0.2 billion driven by a goodwill impairment. Within the reinsurance segment, Munich Re also has some more primary insurance like carriers like Hartford Steam Boiler (HSB). Also the Munich Re groups is active in third-party asset management via MEAG. MAY 31,

5 Business Risk Profile: Very Strong Insurance industry and country risk: Global diversification support intermediate IICRA Munich Re is extremely well diversified over regions and segments, including global P/C reinsurance, life reinsurance, global health insurance, a leading market position in the German health insurance market, and some smaller primary insurance operations, including in Turkey, Poland, and Austria. While product risk is a typical feature especially in P/C reinsurance we believe, Munich Re faces moderate industry risk. We regard the unpredictable nature of natural catastrophe reinsurance as less pronounced compared to pure P/C reinsurers. In our view the life reinsurance is exposed to low industry risk thanks to the positive earnings trend in this sector and high barriers to entry for potential new entrants. Munich Re's life reinsurance focuses on biometric risks, not assuming the investment risk of the cedants. In our view, Munich Re's primary life and health insurance operations in Germany are exposed to intermediate risk. This reflects high product risk in the German life sector on traditionally high asset-liability risks on the back of long life insurance contract duration with guarantees as well as political risks in the health segment. Munich Re's German primary P/C is, in our view, exposed to low risk based on the market's high barriers to entry and neutral profitability subfactor. Table 2 Munich Reinsurance Co. Industry And Country Risk (Re)Insurance sector IICRA Business mix (%) Global P/C reinsurance Intermediate risk Global life reinsurance Low risk Other health Intermediate risk Germany health Intermediate risk Germany life Intermediate risk 7.40 Germany P/C Low risk 6.68 Poland P/C Moderate risk 1.86 Global trade credit insurance Intermediate risk 1.28 Austria life Intermediate risk 1.05 U.K. P/C Intermediate risk 0.93 Poland life Moderate risk 0.78 U.S. health Low risk 0.75 Italy life Moderate risk 0.57 Turkey P/C Moderate risk 0.54 Belgium life Intermediate risk 0.49 Weighted average IICRA Intermediate risk 2.75 IICRA--Insurance Industry Country And Risk Assessment. P/C--Property/casualty. Competitive position: Extremely strong, based on market-leading global position that allows for differentiated pricing Munich Re's competitive position is extremely strong, in our opinion, primarily owing to its market-leading position in MAY 31,

6 the global reinsurance sector and its extremely strong diversification by lines of business and regions. Munich Re has a market-leading position in the global P/C and life reinsurance markets, accompanied by a significant presence in all primary insurance lines. In our view, Munich Re's highly recognized brand, presence, and expertise in the global reinsurance market is a competitive strength. We believe this is backed by Munich Re's ability to offer a large number of private deals with differentiated terms, allowing for some independence from the general decline in pricing. Moreover, in view of its global diversification, we assume that Munich Re will be able to weather the challenging soft market conditions, especially in property lines exposed to natural catastrophes. We also believe that Munich Re's overall competitive position benefits significantly from its extremely diverse portfolio by lines of business and regions. The group's global presence in its various business lines and the unique diversification by lines of business compared with reinsurance peers makes the group less vulnerable to adverse developments in individual markets. We believe that earnings among the group's P/C reinsurance, life reinsurance, and primary insurance businesses are well diversified. Munich Re's primary insurance operations (ERGO) contributed 32% of Munich Re's overall GWP in 2015, but contributed a negative result to the group's net profit due to some negative one-offs. The profit contribution from ERGO has been volatile. The persistent low interest rates are a burden on the profitability of ERGO's German life segment. Also Munich Re indicated some upcoming costs for ERGO's new strategy program. Table 3 Munich Reinsurance Co. Competitive Position --Year ended Dec (Mil. EUR) Gross premiums written (GPW) 50,374 48,848 51,060 51,969 49,452 Change in gross premiums written (%) 3.1 (4.3) (1.7) Net premiums written 48,505 47,225 49,404 50,174 46,876 Change in net premiums written (%) 2.7 (4.4) (1.5) Reinsurance utilization--premiums written (%) Business segment (% of GPW) P/C reinsurance Life reinsurance P/C insurance Life insurance Health Financial Risk Profile: Very Strong Munich Re's very strong financial risk profile is based on its extremely strong capital adequacy, high quality of capital and strong financial flexibility. This is somewhat mitigated by the moderate risk positions given Munich Re's exposure to natural catastrophe risk in P/C reinsurance and interest rates in the primary life insurance segment. MAY 31,

7 Capital and earnings: Extremely strong on the back of financial discipline The assessment of extremely strong capital and earnings is on the basis of extremely strong 'AAA' capital adequacy, as well as our expectation of ongoing financial discipline. With regard to underwriting and investment risks, we assume that prospective capital adequacy will remain within the extremely strong category over In our base-case assumptions, prospective earnings are affected by continued soft P/C reinsurance market and low interest rates, but will cover funding dividends and forthcoming share buy-backs sufficiently. Our assessment of Munich Re's ECM as good is enhancing the capital adequacy assessment as well as some benefit for non-life reserve redundancy. We also do not expect any material changes to conservative investment risk-taking, and therefore no material change to capital requirements arising from investment risks. Table 4 Munich Reinsurance Co. Capitalization Statistics --Year ended Dec (Mil. EUR) Common shareholders' equity 30,965 30,289 26,188 27,439 23,309 Change in common shareholders' equity (%) (4.6) Total reported capital 36,123 35,427 31,322 33,695 28,871 Change in total reported capital (%) (7.0) Table 5 Munich Reinsurance Co. Earnings Statistics --Year ended Dec (Mil. EUR) Total revenue 60,538 57,948 60,010 62,304 58,008 EBIT adjusted 3,123 1,759 3,360 3, Net income (attributable to all shareholders) 3,122 3,170 3,333 3, Return on revenue (%) Return on reported shareholders' equity (%) Return on total reported capital (%) P/C reinsurance: net expense ratio (%) P/C reinsurance: net loss ratio (%) P/C reinsurance: net combined ratio (%) P/C--Property/casualty. Risk position: Moderate, reflecting diversification but some natural catastrophe and interest rate risks We regard Munich Re's risk position as moderate. This is mainly on the back of potential capital and earnings volatility driven by its P/C reinsurance natural catastrophe exposure. However, compared to most P/C reinsurers, in our view, Munich Re's well diversified business mix supports the moderate risk assessment. Also Munich Re's primary life business is exposed to interest rate risk. With 9.4 billion GWP in 2015, the ERGO life and health segment is the largest segment contributing 57% of ERGO's overall GWP. MAY 31,

8 Table 6 Munich Reinsurance Co. Risk Position --Year ended Dec (Mil. EUR) General account invested assets 209, , , , ,902 Change in general account invested assets (%) (0.7) 8.9 (2.9) Separate accounts/unit linked assets 9,163 8,461 6,699 5,958 5,093 Change in seperated account invested assets (%) Total invested assets 218, , , , ,995 Change in total invested assets (%) (0.4) 9.5 (2.4) Net investment income 6,821 6,675 6,907 7,776 7,137 Realized capital gains/(losses) 2,693 2,629 1, ,244 Unrealized capital gains/(losses) (1,981) (1,302) (1,421) 8 (1,625) Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including realized and unrealized gains/(losses) (%) Portfolio composition (% of general account invested assets) Cash and short-term investments (%) Bonds (%) Equity investments (%) Real estate (%) Mortgages and loans (%) Investments in affiliates (%) Other investments (%) Financial flexibility: Strong, reflecting prudent financial leverage and no debt maturity peaks In our view, Munich Re's financial leverage of about 14% for 2015 is conservative. Also fixed-charge coverage of about 9x for the same time period stand out in this regards. Combined with its proven capital market track record, we regard Munich Re's financial flexibility as strong. Table 7 Munich Reinsurance Co. Financial Flexibility --Year ended Dec Fixed-charge coverage (x) Financial leverage (%) Other Assessments Enterprise risk management: We assess Munich Re's ERM framework as very strong, reflecting our positive view of the group's risk culture, risk controls, risk models, emerging risk management, and strategic risk management, as well as our assessment of Munich Re's capital model as good, based on our ECM criteria. MAY 31,

9 We view the importance of ERM to Munich Re as high. Munich Re is a complex group, operating in many geographies and diverse lines of business. The group faces catastrophe risk in its reinsurance division, significant exposure to financial losses, particularly in primary life and health insurance, and exposure to global and regional economic cycles. In our opinion, we do not expect the group will experience losses outside its risk tolerance over the next two to three years. The group's ECM is robust and fully integrated, and steers business decisions. The model governance structure is strong and demonstrated by extensive documented analytics and processes. Following a detail assessment of Munich Re's economic capital model, we regard it as good. Management and governance: Strong management track record In our view, Munich Re's management has a proven track record with financial discipline and managing the group through challenging market environment, such as the 2008 financial crisis, the ongoing pricing pressure in P/C reinsurance, and the low-interest-rate environment affecting mainly the group's German life business. We do not expect any change to financial discipline or disruptive changes to the group's strategy after the handover to the newly appointed CEO in Liquidity: Exceptional liquidity on the back of a highly liquid asset portfolio We regard Munich Re's asset portfolio as highly liquid and also note a variety of premium income sources. We also do not expect any refinancing concerns, and we believe the group is capable of managing unexpectedly large claims or unexpected rises in life insurance lapses. Accounting Considerations Munich Re prepares its financial statements under International financial Reporting Standards (IFRS). The group has a track record of rigorously impairing goodwill early, since operating performance no longer meets group standards. Following very prudent MCEV disclosure, without the use of any illiquidity premiums, Munich Re shifted to the so-called Solvency II balance sheet for its 2015 results. For Solvency II reporting, the group is not using any matching adjustment, volatility adjustment, third-country equivalence, or transitionals. In our analysis of capital adequacy, we recognized partial credit for: Credit on deferred tax liabilities relating to the claims equalization reserve; Equity credit granted to hybrid securities up to the level recognized in regulatory solvency capital; An adjustment to the standard duration mismatch on back of positive assessment of asset-liability management risk-controls; 50% of loss-reserve redundancy; and Some benefit from our review of Munich Re's ECM. Related Criteria And Research MAY 31,

10 Related Criteria Group Rating Methodology, Nov. 19, 2013 Enterprise Risk Management, May 7, 2013 Insurers: Rating Methodology, May 7, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 A New Level Of Enterprise Risk Management Analysis: Methodology For Assessing Insurers' Economic Capital Models, Jan. 24, 2011 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Related Research Life Insurer ERGO Leben Outlook To Negative On Declining Profitability; Affirmed At 'AA-' Reflecting Core Group Status, May 18, 2016 Ratings Detail (As Of May 31, 2016) Operating Companies Covered By This Report Munich Reinsurance Co. Counterparty Credit Rating Junior Subordinated American Alternative Insurance Corp. DKV Deutsche Krankenversicherung AG ERGO Direkt Lebensversicherung AG ERGO Lebensversicherung AG ERGO Versicherung AG A A+/Stable/-- A+/Stable/-- AA-/Negative/-- AA-/Negative/-- MAY 31,

11 Ratings Detail (As Of May 31, 2016) (cont.) Great Lakes Reinsurance (U.K.) SE Great Lakes Reinsurance (U.K.) SE (Australia Branch) Munich American Reassurance Co. Munich Mauritius Reinsurance Co. Ltd. Munich Reins America Inc. Munich Reinsurance Co. of Africa Ltd. Munich Reinsurance Co. of Australasia Ltd. Munich Reinsurance Co. of Canada Munich Re of Malta PLC MAY 31,

12 Ratings Detail (As Of May 31, 2016) (cont.) Munich Re Trading LLC New Reinsurance Company Ltd Princeton Excess & Surplus Lines Insurance Co. Temple Insurance Co. Related Entities ERGO Group AG Munich Re America Corp. Senior Unsecured A- Domicile A+/Stable/-- A+/Stable/-- A+/Stable/-- A/Stable/-- A-/Stable/-- Germany *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com MAY 31,

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