Assessing Europe's Global Reinsurers Under IFRS 17
This report does not constitute a rating action.
Volker KudszusFrankfurt+49-693-399-9192
Three of Europe's largest reinsurers--Munich Re, Hannover Re, and SCOR--have published their first full-year results since implementing International Financial Reporting Standard (IFRS) 17.
IFRS 17 removes the asset-liability mismatch inherent in the earlier IFRS 4 standard, allowing reinsurers to present a more-economic balance sheet.
However, the move to a principles-based standard that offers far more options could impede comparability between reported results under different accounting standards, and even between reinsurers that have made different choices under IFRS 17.
To maintain consistency when assessing underwriting performance in property/casualty (P/C) reinsurance, S&P Global Ratings will take a deeper look at the effect of reinsurers' choices, particularly the effect of discounting on reinsurers' combined ratios.
2023 marks a new financial starting point for the many Europe-based reinsurers that made the switch to a new accounting standard on Jan. 1. The annual reports published under IFRS 17 offer investors greater transparency, in some respects, and indicate that global reinsurers based in Europe achieved sound rate renewals and strong technical results across the board. However, S&P Global Ratings considers that the flexibility embedded in the new standard could present a challenge.
Investors expected to find it more difficult to compare results from groups reporting under IFRS 17 with those under reporting under IFRS 4. In our view, the new standard also makes it challenging to maintain consistency over time, and comparability between peers. That said, our ratings on the largest of the Europe-based reinsurers are unaffected by the change.
Transparency for reinsurers that serve the life insurance sector has been significantly improved by two changes under IFRS 17:
Some elements of embedded value value-in-force have been brought onto the balance sheet; and
Both assets and liability are now presented on a market-consistent basis, making it easier for external stakeholders to capture reinsurers' sensitivity to interest rates. Under IFRS 4, assets were presented at market value and liabilities at book value, creating an economic mismatch.
In the non-life sector, IFRS 17 allows reinsurers to display, on top of best-estimate reserves, a contractual service margin (CSM) and a risk adjustment, thus adding transparency. However, many reinsurers have chosen to use the premium allocation approach, rather than publishing a CSM. In addition, a few reinsurers still take a prudent view of best-estimate reserving, and so maintain a material reserve redundancy within their liability for incurred claims.
The new standard offers reinsurers more flexibility in how they discount insurance liabilities. Individual groups may use a variety of top-down or bottom-up approaches to derive their own discount rates. As a result, even within the eurozone, we see a wide variety of discount rates being applied.
This has a significant impact on our key underwriting metric, the combined ratio. We now calculate it as the insurer's service expenses, divided by its revenue. It is no longer directly comparable with the legacy combined ratio, which was calculated as the ratio of costs and claims to premiums. In addition, expenses that cannot be attributed directly to reinsurance contracts or groups of contracts are not accounted for under IFRS 17. These have therefore been excluded from the combined ratio, making comparability and consistency even harder to achieve.
In our view, although the transition to IFRS 17 offers advantages, especially the more-economic balance sheet and transparency around the CSM, the flexibility it offers has implications for our ratings analysis. To compare a reinsurer's capital and earnings, or its operating performance, against that of its peers, we need to pay close attention to the effects of the choices each group has made. Our view of capital adequacy, which is expressed within the capital and earnings score, incorporates our assessment of qualitative factors. These may prompt us to make an adjustment outside of our capital model, especially where reinsurers have relied heavily on nonfungible, other equity-like reserves, such as CSM.
The new standard offers reinsurers more flexibility in how they discount insurance liabilities.
Financial highlights for 2022 and 2023
Published figures for 2022 under IFRS 4
Published 2022 figures adjusted to IFRS 17
Published figures for 2023 under IFRS 17
GPW
Total rev.
Net profit †
Equity ‡
ROE (%)
P/C COR (%)
Ins. rev.
Gross CSM
Net CSM
RA
Global reinsurers
Munich Re (bil. €)
67.1
--
3.4
21.2
13.5
96.2*
55.4
5.3
27.3
25
18
4.1
20.2
83.2*
57.9
4.6
29.8
25.1
19.2
4.7
15.7
85.2*
Hannover Re (bil. €)
33.3
31.7
1.5
8.7
14.1
99.8
24
0.8
10
N/A
6.6
3.7
8.2
94.5
24.5
1.8
11
7.7
19
94
SCOR (bil. €)
19.7
20.6
(302.0)
5.1
(5.3)
113.2
15.9
(1.4)
4.4
(25.2)
114.9
4.5
18.1
85
Swiss Re (bil. $)§
47.9
46
0.5
12.8
2.6
102.4*
50
3.2
16.4
22.3
94.8*
Global multiline insurers
Allianz (bil. €)
94.2
152.7
7.2
55.2
10.3
87
6.9
58.7
53.4
12.7
93.3
91.3
9
63.6
53.8
32.7
16
93.8
AXA (bil. €)
99.4
102.3
48.4
94.6
80.4
5.2
49.1
33.5
97.6
80.9
7.4
52.4
34
26.6
93.2
Aegon (bil. €)
14.8
(2.5)
13.6
11.3
(1.0)
10.9
9.1
13.1
10.4
(0.2)
9.6
8.3
15
Aviva (bil. £)
18.9
(21.2)
(1.1)
12.9
12.5
16.9
10.2
5.7
1.4
9.4
95.2
18.5
1.1
96.2
Mapfre (bil. €)
29.5
8.4
98
22.7
1
8.9
2.3
7
96.5
24.8
1.3
9.7
96.6
Zurich (bil. $)
56.1
41.8
4.9
27.9
94.3
50.8
4.3
26.9
17.4
3
17.8
26.3
21
3.5
23.1
*Reinsurance only. §All figures are based on U.S. generally accepted accounting principles. Insurance revenue is gross premium written. †Including minorities. ‡Including minority interests. GPW--Gross premium written. ROE--Return on equity. P/C--Property/casualty. COR--Combined operating ratio. CSM--Contractual service margin. Ins. rev.--Insurance revenue. RA--Risk adjustment. N/A--Not applicable. Source: Annual reports 2022 and 2023, S&P Global Ratings.
*COR ratio only covers reinsuranced. Data estimated. §Swiss Re transitioned to IRFS 17 in 2024. ROE--Return on equity. P/C--Property/casualty. COR--Combined operating ratio. CSM--Contractual service margin. N/A--Not applicable. Sources: Annual reports 2022 and 2023, S&P Global Ratings.
Munich Re, Hannover Re, and SCOR were among the reinsurers that implemented IFRS 17 during 2023; Swiss Re followed in 2024. Although the new standard has increased transparency in some respects, it has also highlighted some major obstacles to maintaining comparability and consistency. IFRS enables reinsurers to take differing approaches to the discounting of reserves--each group could calculate its own specific discount rates, making it more difficult for external stakeholders to assess their results on a level playing field.
In particular, unless a stakeholder knows the point-in-time discount factors that have been used, key performance indicators, such as the combined ratio, will not be directly comparable with the combined ratios of reinsurers that are not reporting under IFRS 17. We need to make the combined ratio under IRFS 17 and other accounting regimes easier to compare by examining and highlighting the effect of discounting. For example, in the 2023 annual results for Munich Re, Hannover Re, and SCOR, we see that discounting affected the combined ratio for their P/C business by about 6.5-8.5 percentage points (ppts).
Combined ratios are also affected by IFRS 17's approach to expenses, which again, moved results away from being directly comparable with those under U.S. generally accepted accounting principles (GAAP) and U.K. GAAP. Only expenses that can be directly attributed to insurance contracts, or groups of contracts, are included in the technical accounts. The effect is smaller than that of discounting, but further widens the gap between the old and new combined ratio. The global reinsurers all indicated the magnitude of the effect on their combined ratios:
At Hannover Re, it was about 0.6 ppt lower;
At Munich Re, it was about 1-2 ppts lower; and
At Scor, it was about 3 ppts lower.
Key performance indicators for the life business of global multiline insurers were also affected by the move to the new standard. Although profitability was robust in 2023, we do not consider a group's results under IFRS 17 directly comparable with its historical results under IFRS 4. In addition, the 2023 results cannot be directly compared with those of global multiline insurers that report under other standards, for example, any U.S. peers.
Nevertheless, we welcome the change to reporting both assets and liabilities on a market value basis. This is particularly importance in the life sector, where assets typically have a much longer duration than in non-life. Results for 2023 reported under IFRS 4 would include unrealized investment losses on bonds (especially life bonds) booked against shareholders' equity. The losses were caused by higher interest rates. However, the concurrent effect of those interest rates on insurance liabilities would not be recorded.
IFRS 17 gives external stakeholders access to a much more economic view of the balance sheet. For example, Allianz's 2023 results showed net unrealized losses on investments of about €37 billion within shareholders' equity. However, it also showed that this was almost fully offset by about €34 billion of net unrealized gains from insurance contracts. At AXA, the effect was similar, with about €11 billion in net unrealized losses and €9 billion in net unrealized gains.
The new standard could also bring more attention to the embedded value elements of value-in-force, which are now on the balance sheet in form of the CSM. We anticipate that this could improve the quality of reporting for these elements, given that they will be subject to a full audit.
In 2023 discounting affected the combined ratio for the P/C reinsurance business by about 6.5-8.5 percentage points.
For Europe's global multi-line insurers and reinsurers, the move to IFRS 17 is a definite step forward. It offers an economic balance sheet, removing the previous asset-value mismatch embedded in IFRS 4. Stakeholders gain a clearer view of how interest rate moves affect shareholder equity through unrealized gains and losses. Similarly, reserve redundancy in non-life business has become more transparent.
However, IFRS 17 also brings with it entirely new areas of complexity. It has widened the gap between IFRS and other accounting standards such as U.S. GAAP and U.K. GAAP, so that multiple adjustments are required to make consistent comparisons between international peers. In addition, maintaining consistent, comparable key performance indicators--even among peers that are nominally using the same standard--will require careful adjustment, similar to those needed under IFRS 4.
At this stage, it is particularly important that public reporting facilities comparisons by external stakeholders. Given our focus on how discounting affects the combined ratio, we particularly appreciate the transparency of the global reinsurers that have transitioned to the new standard on this matter.
Volker KudszusFrankfurt+49-693-399-9192volker.kudszus@spglobal.com
Robert J GreenstedLondon +44-20-7176-7095robert.greensted@spglobal.com
Mark D NicholsonLondon +44-20-7176-7991mark.nicholson@spglobal.com
Johannes BenderFrankfurt +49-693-399-9196johannes.bender@spglobal.com
Silke SachaFrankfurt +49-693-399-9195silke.sacha@spglobal.com
Marc-Philippe JuilliardParis +33-14-075-2510m-philippe.juilliard@spglobal.com
Taos D FudjiMilan +39-02-7211-1276taos.fudji@spglobal.com
Jure KimovecFrankfurt +49-693-399-9190jure.kimovec@spglobal.com
Jean Paul Huby KleinFrankfurt +49-693-399-9198jeanpaul.hubyklein@spglobal.com
Olivier J KarusisiParis +44-20-7176-7248olivier.karusisi@spglobal.com
Simon VirmauxParis +33-1-4075-2519simon.virmaux@spglobal.com
Oriane Peyredieu du CharlatParisoriane.p@spglobal.com
