With rising property and casualty reinsurance claims and failing investment returns, S&P Global Ratings expects the coronavirus pandemic to turn 2020 into a tough year for global reinsurers.
As a consequence, S&P believes the sector’s ability to earn its cost of capital in 2020 has visibly reduced, to almost negligible.
Including assumptions for 2020, it’s believed the sector will have failed to earn its cost of capital three times within 2017-2020, which will be the worst sequence of results in the past 15 years.
Analysts estimate that COVID-19-related losses in first-quarter 2020 added an additional 10 percentage points on average to the combined ratio of the quarter for the sector.
This, coupled with investment losses, has dropped the sector’s return on capital to about 3.5% in first-quarter 2020 from 7.4% as of year-end 2019, while the cost of capital increased to about 7.7% at the end of first-quarter 2020, from 5.9% at year-end 2019.
Furthermore, because business conditions are expected to have become much tougher for global reinsurers, S&P has revised its sector outlook to negative from stable.
It’s also believed that COVID-19-related claims on the P/C reinsurance side are rising and started to negatively affect reinsurers in the first quarter.
COVID-related losses for the top 20 reinsurers amounted to about 10 percentage points on average of the combined ratio for the quarter.
These losses mainly include event cancellation claims but, selectively, reserves set aside for business interruption, directors and officers, credit, and travel, and were mostly first-order impacts from the outbreak.
However, there isn’t much of a consistency in the figures because the reinsurers recognize the losses using different approaches.
S&P expects additional direct COVID-19-related losses to be recognized in the second quarter, and for indirect impacts of COVID-19 to emerge over the coming quarters.
The global reinsurance sector is facing historically unusual times where a single event is
materially disrupting both the asset and liability side of their businesses. There are not many places that provide respite.
Therefore, S&P believes fundamental, disciplined underwriting and risk pricing, tighter terms and conditions with clear exclusions, and overall proper risk management are key if reinsurers are to defend their competitive position, and preserve earnings and capital strength.
For a few players that may struggle to navigate these uncertain times, we can expect their creditworthiness to suffer.
“Once again, the sector will not earn its cost of capital this year, bearing in mind it has struggled in the past three years to do so due to large natural catastrophe losses and fierce competition,” said S&P Global Ratings credit analyst Johannes Bender.
S&P Global Ratings credit analyst Taoufik Gharib added, “We expect to take negative rating actions on reinsurers whose COVID-19 losses wipe out their earnings and become a capital event and that in our view won’t be able to sufficiently rebuild capitalization over the next 12 to 24 months, as well as for those reinsurers that entered 2020 with an already historical weaker operating performance.”
