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Fitch turns negative on global reinsurance, US P&C fundamentals

23rd March 2020 - Author: Charlie Wood

The unfolding Coronavirus outbreak has prompted Fitch Ratings to revise its outlook for the underlying fundamentals of the global reinsurance sector to negative from stable.

Fitch-RatingsThe ratings agency also revised its outlook for the US property and casualty insurance sector, citing concerns over coronavirus and related impacts on the credit quality of insurers.

While Fitch’s outlook for ratings levels in both sectors remains stable, the firm anticipates a reassessment as analytical work related to the pandemic advances.

Fitch adds that it is in the process of reviewing ratings relative to assumptions with respect to the impact of the coronavirus pandemic on capital markets volatility, interest rates, market liquidity and insured claims/reserves.

The company said it will compare the pro forma profile of an insurer relative to existing ratings sensitives established by the agency and, If sensitivities are notably breached, ratings will be placed on rating watch negative or downgraded.

Currently, Fitch believes the ratings of US P/C insurers and global reinsurers will be less impacted by the coronavirus pandemic than those of life and health insurers, which are sectors with outlooks recently revised to negative by Fitch.

However, Fitch’s stable rating outlook for the insurance and reinsurance sector does not imply that no ratings in the sector will be impacted by these ongoing events.

In addition, Fitch expects the ratings of some US P/C insurers and broader reinsurers will be placed on rating watch negative. Near-term downgrades are possible, but currently viewed as unlikely.

The reinsurance sector has benefited from a trend of recent price improvements, very strong capital adequacy going into 2020, robust risk management and generally solid business profiles.

Fitch views the underwriting loss exposure (contingency/event cancellation, travel/accident, trade credit, surety and business interruption) from the virus as manageable for reinsurers given the relatively small size of the exposed lines, and the use of policy limits/sub-limits and exclusions.

The US P&C sector, meanwhile, reported an underwriting profit for the last two consecutive years, and an estimated 10%+ growth in surplus in 2019 on stable earnings and higher unrealized investment gains.

Fitch notes that companies with significant allocations to equity investment will see capital declines in the next quarter and investment income will decline YoY with lower bond yields.

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