Munich Re's performance 'will decline' in 2020, predicts S&P

S&P Global Ratings has revised down its earnings projections for Munich Re as analysts believe that the reinsurer's performance "will decline" due to COVID-19 related P&C losses, with its combined ratio reaching 103 percent for the financial year 2020.

The ratings agency has affirmed Munich Re's AA- rating, stating that it has sufficient capital to cope with further market volatility and possible large man-made losses or natural catastrophe events to which it remains exposed.

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 - €221 million in net profit, compared with €633 million for the same period in 2019.

S&P has forecasted the group's combined ratio at about 103 percent and the return on equity (ROE) at 3-6 percent for year-end 2020, assuming a normal level of natural catastrophe losses and average reserve releases of about 4 percent of premiums.

The ratings agency, however, expects a recovery in earnings during 2021 with the combined ratio improving to 96-98 percent and the ROE to 8-10 percent, supported by retained earnings and the temporary suspension of Munich Re's €1 billion share buyback programme.

S&P has maintained a stable outlook reflecting its view that the German reinsurer will maintain capital adequacy above the 'AA' confidence level in 2020-2022, improve earnings in 2021-2022, and defend its "extremely strong competitive position" during the next 12-24 months.

The agency warned that it might consider a negative rating action over the next two years if the group is likely to perform well below its 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.

It stated that an upgrade in the ratings was "unlikely" over the next two years as it would hinge on the group's ability to further diversify its earning streams, with a sustainable and sizable contribution from its primary insurance operations.