European Reinsurance Peer Reviewcdn.roxhillmedia.com/production/email/attachment... · Higher Influence: Business Profile Very Strong Business Profile Fitch considers that the four

1www.fitchratings.com | August 2017

European Reinsurance Peer Review


Operating Profile Key Credit Factors Financial Profile Key Credit Factors Insurer Financial Strength

Factor Scores

Industry Profile & Operating Environment

Business ProfileCapitalization & Leverage

Debt Service Capabilities & Financial Flexibility

Financial Performance & Earnings

Investment & Asset Risk

Asset/Liability & Liquidity Management

Reserve AdequacyReinsurance, Risk Mitigation & Catastrophe Risk

Rating

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IssuersMunich Reinsurance CompanySwiss Reinsurance Company LtdHannover Rueck SESCOR SE

IFS / OutlookAA/StableAA-/StableAA-/StableAA-/Stable

Mu

nich

Re

Swiss R

e

Han

nover R

E

SCO

R SE

Mu

nich

Re

SCO

R SE

Swiss R

e

Han

nover R

E

Mu

nich

Re SC

OR

SE

Swiss R

e

Han

nover R

E

Mu

nich

Re SC

OR

SE

Swiss R

e

Han

nover R

E Mu

nich

Re SC

OR

SE

Swiss R

e

Han

nover R

E

Mu

nich

Re

SCO

R SE

Swiss R

e

Han

nover R

E Mu

nich

Re SC

OR

SE

Swiss R

e

Han

nover R

E

Mu

nich

Re

SCO

R SE

Swiss R

e

Han

nover R

E

Munich Re

SCO

R SE

Swiss R

e

Hannover RE

Mu

nich

Re SC

OR

SE

Swiss R

e

Han

nover R

E

Bar Colours = Relative Importance

Higher Influence Moderate Influence Lower Influence

Bar Arrows = Rating Factor Outlook

Positive Negative Evolving Stable

This Peer Review report compares and contrasts the key credit factors affecting the ratings of the insurers listed to the right.

Fitch Ratings assigns a score to each of the nine key credit factors (as outlined in the table below) underlying the groups’ Insurer Financial Strength (IFS) ratings. These scores are denoted by lower case letters and follow the same scale Fitch uses for its IFS ratings (i.e. ‘aaa’ to ‘c’).

Each score’s relative influence (higher, moderate, lower) on the insurers’ ratings and the outlook (stable, positive, negative) is also shown.

The information in this Peer Review is derived from the most recently published Insurance Ratings Navigator report on each group, which is developed based on application of Fitch’s Insurance Rating Methodology. Links to the insurers’ individual Navigator reports, applicable criteria report and other related research are on the final page of this report.



Higher Influence: Business Profile

Very Strong Business ProfileFitch considers that the four major European reinsurers are among the top tier of global reinsurers, by business profile. Large franchises and a high degree of diversification underpin the very strong assessment of each company. They are the four largest reinsurance companies globally by reinsurance premiums. Business diversification is a positive rating factor, with each company writing a combination of property and casualty (P&C) and life reinsurance, and, for Munich Re and Swiss Re, primary business.

Renewal Discipline MaintainedThe strength of each reinsurer’s market position is shown by the pricing discipline achieved at major renewals in recent years. Each of the four companies had low-single-digit decreases for renewed business over that time, while policy terms and conditions were largely stable. The ability to maintain disciplined underwriting is a key competitive advantage for maintaining profitability in current market conditions, which have been hit by a protracted period of falling prices and declining investment yields.

Munich Re and Swiss Re: Dominant P&C Reinsurance Market PositionsMunich Re and Swiss Re have the strongest market positions among the four reinsurers. Their franchises are supported by dominant, long-established P&C reinsurance market shares that have endured through tough (re)insurance market pricing and credit cycles. Both have the scale to deploy underwriting capacity in larger volumes than smaller peers across multiple classes, a requirement that has grown in importance as reinsurance is progressively transacted with larger primary insurers that place centralised multi-risk covers through global broker programmes.

The ability to lead programmes gives the reinsurers greater ability to influence pricing and terms and conditions. These two reinsurers typically occupy the strongest and most secure positions on reinsurance panels.

Hannover Re and SCOR: Strong and Developing Group FranchisesHannover Re and SCOR have notably smaller absolute size and more modest market shares, especially in the major reinsurance classes. Each writes a smaller proportion of volatile property and catastrophe business than their larger peers, allowing them to operate with more efficient capital structures, as indicated by a higher proportion of hybrid debt. Their franchises continue to develop, with SCOR successfully building its life reinsurance business through two major acquisitions in recent years. Both companies have had strong growth in financial solution-type and specialist products.

Very Strong Ratings a Competitive AdvantageFinancial strength, underpinned by strong capitalization, is a key competitive differentiator and positive rating factor for each reinsurer. An ‘A-’ rating is commonly considered a minimum financial strength requirement by brokers looking to place business with reinsurers, but ‘AA’ range ratings give additional security for ceding insurers and therefore ‘AA’ rated reinsurers get to see most of the business in the market, some of which would not be available for lower-rated peers. This is reflected in lower capital charges for counterparty default risk under risk-based regulatory capital regimes including Solvency II. All four companies have had good stability in the strength of their capitalization in recent years. This is an important consideration for ratings in this high category.

Size and Scale

Note: Bubble size denotes total NWP including non-life reinsurance, life reinsurance and primary business, where applicable.Primary includes all business not designated as reinsurance segment. Source: Fitch

Factor Levels Business Profile

Munich Re AA Swiss Re AA- Hannover Re AA- SCOR SE AA-

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a

a-

Non-Life Reinsurance Life Reinsurance Primary Insurance

Munich ReEUR49bn

Swiss ReEUR32bn

Hannover ReEUR16bn

SCOR SEEUR14bn

60%40%56

%

44%

53%34

%

13%36%

20%

44%



Very Strong Capital AdequacyThe capital adequacy of all four companies based on Fitch’s risk-based Prism Factor-Based Model (FBM) assessment, is either “Very Strong” or “Extremely Strong”. However, the quality of available capital captured within the Prism FBM assessment varies by insurer. It is marginally lower for Hannover Re and SCOR due to the presence of higher proportions of softer forms of capital including value of in-force and equity credit for subordinated hybrid debt. For SCOR this is mainly driven by the high proportion of life business in its portfolio.

Very Strong Regulatory Solvency CoverageThe regulatory-assessed solvency coverage for each company is consistent with Fitch’s Prism FBM view, being very strong. The ability to absorb major losses while protecting own solvency funds is a fundamental need for all reinsurers, a point emphasised by the robust capital buffer maintained by each company. Hannover Re, Munich Re and SCOR started operating under Solvency 2 on 1 January 2016, and in each case the solvency coverage ratio is within or above the target range set by each company – levels they consider optimal for their businesses (see chart). Swiss Re reports coverage under the Swiss Solvency Test and also reported very strong coverage.

TFC Leverage Influenced by LOCsReinsurers typically have total financing and commitment (TFC) ratios of “average” to “above average” (a higher ratio is less favourable), due to the significant use of letters of credit (LOCs). LOCs are used in a number of ways throughout reinsurers’ businesses, typically as collateral, and determining the appropriateness of how the LOCs are used within each reinsurer’s business helps to decide the relative influence of the TFC ratio within the Capitalization & Leverage credit factor. The TFC ratio is not a constraining factor for any of the four major European reinsurers.

Modest Financial LeverageThe major European reinsurers have lower financial leverage than the major primary insurance groups, with the financial leverage ratio (FLR) for the four reinsurers ranging from “strong” to “very strong”. SCOR and Swiss Re’s FLRs are higher in the group, reflecting greater use of debt funding within their respective capital structures. Fitch does not expect FLRs to materially increase while soft market conditions remain. SCOR’s financial leverage increased temporarily in 2015 after it issued EUR600 million subordinated notes, pre-financing a call in 2016, before leverage returned to previous levels following debt calls in 2016. Reinsurers are returning capital to shareholders due to limited opportunities to deploy it profitably.

302

223 221 211

267

223 230 225

0

50

100

150

200

250

300

350

Munich Re Swiss Re HannoverRe

SCOR

(%)

Regulatory solvency ratioª2015 2016

a Swiss Re operates under the Swiss Solvency Test, all others operate under Solvency 2.Source: Fitch, companies' annual reports

15

2422

24

14

22

16

29

13

21

15

25

0

5

10

15

20

25

30

35

Munich Re Swiss Re Hannover Re SCOR

(%)

Financial leverage ratio2014 2015 2016

Source: Fitch, companies' annual reports

Higher Influence: Capitalization & Leverage

Factor Levels Capitalization & Leverage


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P&C Reinsurance Is Main Profit DriverP&C reinsurance is the main generator of operating profit for each company, accounting for half to three-quarters of operating earnings. Life reinsurance provides some earnings diversification and reduces portfolio volatility for each company, but the overall contribution to group profits for this business line is modest in each case. Fitch expects the earnings contribution of life reinsurance to increase as this class of business develops further.

Strong Resilient Earnings GenerationThe ability to maintain very strong earnings metrics when faced with a protracted period of challenging market conditions is an important differentiator for ‘AA’ rated companies, compared with other lower rated companies. Earnings at group level for the four reinsurers have had lower volatility than smaller, less diversified reinsurance peers in years with high catastrophe losses. Hannover Re and SCOR operate more similar, lower risk, less catastrophe exposed, business profiles than Munich Re or Swiss Re.

Normalised Combined Ratios RisingP&C reinsurance combined ratios are rising, normalised for variations from reinsurers’ budgeted totals for both major losses and prior-year reserve development.

The normalised combined ratios for some of the major European reinsurers breached 100% in 2016, indicating that had major loss experience and reserve development been in line with budget, they would have made underwriting losses. Hannover’s normalised combined ratio was 103.8% in 2016 compared to a reported ratio of 93.7%. The difference between Hannover’s normalised and reported results is mainly explained by significant reserve releases of EUR804 million and lower natural catastrophe losses than budgeted.

Primary Insurance Businesses Provide DiversificationMunich Re and Swiss Re write primary insurance business within their respective groups. Munich Re’s primary business is represented by the ERGO brands, which comprise large domestic German operations, in addition to international business. Recently, Munich Re’s earnings have shown the strain of the losses in the ERGO business, which it is restructuring. Profit guidance has been revised down and we see an increased possibility of lower earnings in future than in recent years. Fitch reflects this weakness in the negative forward trend in the Navigator score.

Higher Influence: Financial Performance & Earnings

Factor Levels Financial Performance & Earnings


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91 92 93 90 96 81 83 84 86 94 96 95 95 94 94 94 94 91 91 93

94 94

99 99 100

90

94 94

100 100 99 99 99 100

104

95 94 9496

94

80

90

100

110

2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016


%

Major European ReinsurersReported vs. Fitch normalised P&C combined ratio

Reported Normalised

Source: Company reports, FitchSource: Company reports, FitchSource: Company reports, FitchSource: Company reports, FitchSource: Company reports, FitchSource: Company reports, FitchSource: Company reports, FitchSource: Company reports, Fitch

4.13.1

4.6 5.1 4.6

2.9 3.3

22.6

1.4

5.76.3

4.2

6.2

9.2

7.1

4.4 4.55.5

6.7

0

2

4

6

8

10

2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016


(%)

One Year Reserve Development / Prior Year Equity

Source: Company reports, Fitch



Prudent Reserving StandardsDiscipline and prudence are two key factors that underpin reserving approaches that have been applied consistently by all four reinsurers and led to many successive years of positive development. Each company has had a positive track record of prior-year development (reserve surplus generated from earlier underwriting years).

Reserve Releases Supplement EarningsIt is harder to determine whether prior-year reserve surpluses are being released to supplement earnings. Each company follows a different philosophy regarding the level of carried reserve margin (most often described as surplus over best estimate), and when and how much should be released.

Significant Amount of ReservesThe size of reserves as a proportion of the overall balance sheet is high, partly due to each insurer writing a large amount of longer-tail business. This increases the importance of reserving within the overall credit assessment.

Strong Reserve BuffersFitch considers Munich Re to employ the most conservative reserving approach among the four reinsurers, as it carries a larger reserve buffer (4pp a year) as a minimum. Fitch considers the ability to continue to generate positive development from prior-year reserves as important for each company, because it would prove difficult for an individual company to address any deterioration or adverse development in current market conditions.

4.13.1

4.6 5.1 4.6

2.9 3.3

22.6

1.4

5.76.3

4.2

6.2

9.2

7.1

4.4 4.55.5

6.7

0

2

4

6

8

10

2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016


(%)

One Year Reserve Development / Prior Year Equity

Source: Company reports, Fitch

Moderate Influence: Reserve Adequacy

Factor Levels Reserve Adequacy


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Strong Risk-Management ProgrammesFitch considers that risk mitigation is strong for each reinsurer, with capital well shielded through the execution of prudent risk management programmes. The fundamental nature of their respective businesses, which includes managing volatile losses, means strong risk management is a key part of maintaining financial strength through periods of major loss activity.

Use of Capital Market AlternativesThe large size of the four companies’ reinsurance portfolios has enabled them to use a variety of alternative risk transfer mechanisms, including insurance-linked securities or catastrophe bonds. Each is a regular issuer of catastrophe bonds, transferring a variety of peak natural catastrophe exposures, and longevity and mortality risk associated with life reinsurance. The ability to transfer peak exposures in this way provides additional flexibility when underwriting specific lines of business, and brings diversification to risk programmes.

Limited RetrocessionReinsurers purchase less traditional reinsurance (retrocession) cover than primary insurance companies (less than 5% by Munich Re and Swiss Re and about 10% by Hannover Re and SCOR). This is largely due to their ‘AA’ range financial strength, which limits the options for placing business with similarly strong counterparties. There is also a reluctance to retrocede significant proportions of potentially profitable business, with the main purpose of risk transfer being to remove peak exposures, usually through the purchase of excess-of-loss retrocession cover.

Moderate Influence: Reinsurance, Risk Mitigation & Catastrophe Risk

Factor Levels Reinsurance, Risk Mitigation & Catastrophe Risk


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0.91.3

2.5 2.2

5.5

4.75.2 5.5

0

1

2

3

4

5

6

Munich Re Swiss Re Hannover Re SCOR SE

Net Natural Catastrophe Losses/Net Earned Premium(P&C Reinsurance)

2015 2016

Source: Companies' annual reports, Fitch

(%)



Factor Levels Debt Service Capabilities & Financial Flexibility


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Operating Environment Remains ChallengingFitch’s fundamental outlook for the reinsurance sector is negative. We expect premium prices and investment yields to continue to decline, weakening profitability. In recent years, low barriers to entry, combined with declining investment yields, have resulted in the encroachment of alternative capital, especially into US property catastrophe lines.

With major loss activity below long-term historical levels, these factors have intensified competition, leading to falling prices. A rash of M&A activity occurred in 2015 and 2016, as small and mid-tier specialist reinsurers reacted to the limited organic growth opportunities and tough market conditions.

Continued Strong Underwriting PerformanceThe global reinsurance industry reported strong underwriting performance in 2016, but performance weakened compared with 2015. This was mainly a result of an increase in major loss activity in 2016 compared to 2015, although catastrophe activity remained below historical averages. Results were significantly helped by prior-year reserve releases and the lower-than-expected major losses, which lowered combined ratios compared to budget. The aggregate normalised combined ratio for the four major European reinsurers, excluding the impact of these two factors, is almost 100%, a slight deterioration from the prior year.

Moderate to Strong Fixed-Charge CoverInterest coverage is moderate to strong, with each company showing a strong ability to service debt even in years with high major insured losses. Hannover Re had the highest level of fixed-charge cover among the four reinsurers.

Strong Financial Flexibility Financial flexibility is strong for each reinsurer, supported by the ability to access a diverse range of financing sources, should they be required. The ability to access funding at short notice is often a key requirement in the days and weeks following a major loss event, although the soft market conditions of recent years have resulted in the four reinsurers returning capital to shareholders due to limited growth opportunities.

Moderate Influence: Industry Profile and Operating Environment

Factor Levels Industry Profile and Operating Environment


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Lower Influence: Debt Service Capabilities & Financial Flexibility



Asset Risk Well ManagedReinsurers’ investment strategies are designed to fulfil two core outcomes: maintain sufficient liquidity to meet and settle liabilities (claims) in a timely manner; and avoid excessive balance-sheet volatility. An additional influence when considering risk appetite is that each company operates under a risk-based capital supervisory regime. Investment asset quality across the peer group is conservative, with portfolios well managed to minimise excessive volatility and optimise risk exposure.

Asset Quality Very Strong The asset allocation within each company’s investment portfolio is similar, with fixed-income investments representing more than half. The allocation of fixed income between corporate and government bonds is similar, at about half and half. Cash, short-term investments and a small proportion of equities represent about a quarter of the allocation.

The remaining asset allocation varies slightly, with Munich Re holding a large loan portfolio, Swiss Re invested in highly rated securitised and asset-backed instruments and SCOR and Hannover with allocations in covered bonds. Asset quality is very strong for each of the four reinsurers, with investments well diversified across a range of asset classes and with no significant exposure concentrations. The main variation among the companies relates to the weighting of lower-rated corporate bonds, which is marginally higher for Munich Re and Swiss Re.

Well-Managed Asset/Liability ManagementAsset/liability management is more important for Munich Re and Swiss Re as they have exposure to primary life insurance liabilities that contain features that increase interest-rate sensitivity. A number of hedging tools including derivatives and inflation swaps are used to minimise balance sheet volatility. Munich Re’s assets and liabilities are matched at group level, with the gap between reinsurance assets and liabilities the reverse of that in its primary operations, therefore offsetting each other at a group level.

Strong Liquidity All four reinsurers maintain strong liquidity positions to allow them to settle claims in a timely manner, which is especially important after major loss events. Liquidity is supported through access to significant high-quality, marketable assets, while receivables are well controlled.

Lower Influence: Investment & Asset Risk Lower Influence: Asset/Liability & Liquidity Management

Factor Levels Asset/Liability & Liquidity Management


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Factor Levels Investment & Asset Risk


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Munich Reinsurance Company

Capitalization and Leverage 2012 2013 2014 2015 2016

Solvency II SCR coverage (%) - - - 302 267

Gross leverage (x) 3.3 3.5 3.1 3.1 2.8

Net leverage (x) 3.2 3.3 2.9 3.0 2.6

Net written premium/total equity (x) 1.0 1.1 0.9 0.9 0.8

Financial leverage (%) 19 16 15 14 13

TFC ratio (x) 0.5 0.4 0.4 0.4 0.4

Financial Performance and Earnings

Combined ratio - P&C reinsurance (%) 91.2 92.1 92.7 89.7 95.8

Return on equity (%) 12.7 12.4 11.3 10.2 8.3

Change in net written premiums (%) 5 -2 -4 3 -2

Reserve Adequacy

Loss reserves/CY incurred losses (x) 2.4 2.5 2.9 2.9 2.8

Loss reserves/equity (x) 1.6 1.8 1.7 1.7 1.5

Change in loss reserves/earned premium (%) -20 -18 -13 4 6

One year development/PY equity (%) -4.1 -3.1 -4.6 -5.1 -4.6

One year development/PY loss reserves (%) -2.1 -1.9 -2.5 -3.0 -2.7

Reinsurance, Risk Management and Catastrophe Risk 2012 2013 2014 2015 2016

Net written premium/gross written premium (%) 96 97 96 96 96

Reinsurance recoverables/equity (%) 22 20 17 14 11

Investment and Asset Risk

Risky assets to equity (%) 37 48 55 56 60

Non-investment grade bonds to equity (%) 9 12 16 20 17

Unaffiliated equities to equity (%) 23 29 34 32 37

Affiliated investments to equity (%) 5 6 5 4 5

Asset/Liability and Liquidity Management

Liquid assets to policyholder liabilities (%) 72 67 72 70 72

Debt Service Capabilities and Financial Flexibility

Fixed-charge coverage (x) 13 9 5 10 11

Key Financial Metrics (EURbn)

Total assets 252.7 249.0 273.0 268.9 267.8

Total equity 27.4 26.2 30.3 31.0 31.8

Gross written premiums 52.0 51.0 48.8 50.4 48.9

Net income 3.2 3.3 3.2 3.1 2.6



Swiss Reinsurance Company Ltd


Swiss Solvency Test coverage (%) 213 245 249 223 223

Gross leverage (x) 4.1 3.7 3.2 3.2 3.8

Net leverage (x) 3.1 3.0 2.7 2.8 3.4

Net written premium/total equity (x) 0.8 0.9 0.9 0.9 1


TFC ratio (x) 1.1 0.8 0.6 0.6 0.5



Return on equity (%) 13.4 13.5 10.4 13.4 10.5

Change in net written premiums (%) 11 20 4 -4 10

Reserve Adequacy



Change in loss reserves/earned premium (%) -19.5 -17.6 -12.8 3.7 6.1

One year development/PY equity (%) -2.9 -3.3 -2 -2.6 -1.4














Key Financial Metrics (USDbn)

Total assets 211.4 205.2 197.5 196.1 215.1

Total equity 34.0 33.0 33.3 33.6 35.7


Net income 4.3 4.5 3.6 4.7 3.6



Hannover Rueck SE



Gross leverage (x) 4.3 4.5 3.8 4 3.7

Net leverage (x) 3.9 4.1 3.6 3.8 3.5

Net written premium/total equity (x) 1.0 1.1 0.9 1 0.8


TFC ratio (x) 0.9 0.9 0.7 0.8 0.6



Return on equity (%) 15.4 15 14.7 14.7 13.7

Change in net written premiums (%) 12 0 1 18 -2

Reserve Adequacy



Change in loss reserves/earned premium (%) -9.8 2 9.4 -4.6 6.1
















Total assets 52.6 52 58.3 63.2 63.5

Total equity 6.7 6.5 8.3 8.8 9.7

Gross written premiums 13.8 14 14.4 17.1 16.4

Net income 0.9 0.9 1 1.2 1.2



SCOR SE



Gross leverage (x) 3.6 3.5 3.2 3.1 3

Net leverage (x) 3.4 3.2 2.9 2.9 2.8

Net written premium/total equity (x) 0.9 0.9 0.8 0.8 0.8


TFC ratio (x) 0.9 1.1 1.0 1.1 1



Return on equity (%) 9.1 11.3 9.6 10.7 9.3

Change in net written premiums (%) 24 7 11 19 4

Reserve Adequacy


Loss reserves/equity (x) 2.1 2 1.8 1.7 1.7

Change in loss reserves/earned premium (%) -12.4 -5.5 3.3 -8.4 0.1


One year development/PY loss reserves (%) -3.2 -2.1 -2.2 -3 -3.8














Total assets 31.4 33.0 36.2 41.6 43.3

Total equity 4.8 5.0 5.7 6.4 6.7


Net income 0.4 0.5 0.5 0.6 0.6



Analysts

Graham CouttsT (+44) 20 3530 [email protected]

Harish GohilT (+44) 20 3530 1257

[email protected]

Brian SchneiderT (+1) 312 606 [email protected]

Hannover Rueck SE (July 2017)

Munich Reinsurance Company (July 2017)

SCOR SE (July 2017)

Swiss Reinsurance Company (August 2017)

Navigators

Bermuda Market Long-Run Performance (July 2017)

Global Reinsurance Results Dashboard (May 2017)

European Reinsurance Dashboard - 2016 Results (March 2017)

European P&C Reinsurance Showing Resilience (March 2017)

Related Research

Insurance Rating Methodology (April 2017)

Related Criteria

mailto:[email protected]



https://www.fitchratings.com/site/re/901503













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European Reinsurance Peer Reviewcdn.roxhillmedia.com/production/email/attachment... · Higher Influence: Business Profile Very Strong Business Profile Fitch considers that the four