S&P revises Echo Re outlook to positive on improved operating performance

S&P Global Ratings has revised its outlook on Switzerland-based Echo Re to positive from stable, a move that reflects the reinsurer’s improved operating performance.

The rating agency also affirmed Echo Re’s ‘A-‘ long-term issuer credit and financial strength ratings.

“The operating performance of Echo Rueckversicherungs-AG (Echo Re) is improving on the back of more solid underwriting results supported by a net combined (loss and expense) ratio of 96.2%, while the company enjoyed strong business growth of 17.2% in 2022,” S&P stated.

Analysts believe that Echo Re’s underwriting margins will benefit from significant price increases on global reinsurance markets in 2023. This, S&P explains, will support the reinsurer’s prospective underwriting results in 2023-2025.

“We expect that firmer underwriting controls, restrictive business expansion, and maintaining a prudent retrocession protection will prevent material earnings volatility in the medium term,” the rating agency added.

“As a result, we now think that the company will be able to deliver underwriting performance with a combined ratio of 95% or below. In addition, Echo Re’s high-quality investment portfolio is likely to benefit from currently higher reinvestment rates, as well as a solid increase of investment assets due to business growth.”

At the same time, S&P also noted that it continues to consider Echo Re as a strategically important subsidiary for its parent DEVK’s international diversity. Echo Re remains DEVK’s only legal carrier for reinsurance expansion outside Europe and North America. It contributes to DEVK’s international business and product diversification.

Rapid business expansion in the past few years was counterbalanced by several capital injections from DEVK, which analysts believe will recur if needed.

However, with expected good and stable earnings in 2023-2025, they now believe that Echo Re will mainly finance growth through its own solid earnings retention.

“The positive outlook indicates that we could upgrade Echo Re in the next 12-24 months if the company’s underwriting and investment performance confirms more stable and solid operating results, with ROE in the range of 8%-12%. This would enable the company to sustainably generate capital for further business franchise scaling through profitable growth,” said S&P.

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