Analysts at Morgan Stanley have estimated that a scenario including a projected COVID-19 reinsurance impact of $82 billion could lead to a turn in reinsurance pricing.
Responding to the recent Lloyd’s of London pandemic estimate, which put the total cost to the re/insurance industry at $203 billion, Morgan Stanley tried to determine whether COVID-19 has the potential to drive meaningful rate increases.
The Lloyd’s estimate breaks down to an underwriting loss of $107 billion, with a further $96 billion expected from a reduction in value in investment portfolios.
Morgan Stanley calculated that further reinsurance losses of $22 billion, over and above both assumed normalised losses and projected Covid-19 reinsurance impact of $82 billion, could reduce capital in the industry, leading to a turn in reinsurance pricing.
The framework puts pre-tax reinsurance sector earnings at $64 billion, cat budgets at $14 billion, and assumes the reinsurer’s portion of insured Covid-19 losses is 40%, with a 50% share of any additional catastrophe losses.
It is also worth noting that Lloyd’s management further broke down the underwriting loss figure of $107 billion, noting approximately $50 billion of actual claims costs with the remainder owing to anticipated lower profits due to lower premiums.
But even with a claims forecast of $50 billion, Morgan Stanley could not reconcile the top down figure with the bottom-up guidance provided by the industry at Q1 reporting.
For example, from a stock perspective, Hiscox and Beazley shares de-rated considerably since the sell-off, largely on concerns over uncertainty surrounding their exposures to Covid-19-related losses and resulting balance sheet risks.
But with recent capital raises from these companies, analysts now believe both could absorb losses in excess of current guidance without having to raise additional capital.
Moreover, should losses remain within guidance, both companies are now well positioned to take advantage of any pricing dislocation should upward pressure on rates materialise.
Going forward, Morgan Stanley will continue to focus on the magnitude, timing and dispersion of losses, as well as the shape of earnings going forward, capital generation, remittances and dividend outlook.
