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Global reinsurance sector will fail to earn its cost of capital on COVID-19: Fitch

27th May 2020 - Author: Luke Gallin

The wide-reaching and uncertain impacts of the ongoing COVID-19 pandemic means that the global reinsurance sector will fail to earn its cost of capital in 2020, according to Fitch Ratings.

After completing a sector ratings review, Fitch has warned that the financial performance of reinsurers will be hit by mortality claims and losses from numerous lines of business, while financial market turmoil related to the economic fallout will hit assets.

The challenges being caused by the current crisis follows heightened catastrophe activity and rising US casualty claims, which, as noted by Fitch, served to pressure reinsurance companies’ earnings in 2017-2019.

As well as mortality claims, the ratings agency expects to see underwriting losses in event cancellation lines, business interruption, and also credit and surety insurance. First-quarter 2020 results have shown that these lines have already seen losses and there’s an expectation of more to come.

Widespread uncertainty remains surrounding the duration of the pandemic and the potential for a second wave, so it’s going to be some time before the full financial impact on the underwriting side is understood. In addition, Q1 results showed that reinsurers certainly aren’t immune from financial market disruption, with some fairly sizeable investment losses reported amid declining equity markets, although reports suggest that there has been somewhat of a rebound since April.

Fitch continues to view the global reinsurance segment’s capitalisation as strong on average, with pro-forma capital ratios “not much weaker” than those reported at the end of 2019. Ultimately, Fitch expects capital levels to hold up in the majority of cases and to not be a major driver of rating actions.

In light of the coronavirus (COVID-19) outbreak, Fitch conducted a review of global reinsurers’ ratings in April and May. The ratings agency took negative rating actions on six of the 22 reinsurers reviewed, with two one-notch downgrades, three affirmations but with outlooks revised to Negative, and for one the IFS rating was placed on Rating Watch Negative.

For 15 of the groups reviewed, Fitch notes that the IFS ratings were affirmed with Stable outlooks and for one the Rating Watch Evolving on the IFS rating was maintained.

“The main driver for the negative rating actions was deteriorating financial performance,” says Fitch.

Through 2020 and 2021, Fitch says that primary insurance premiums might well contract in light of the economic situation, but adds that it expects to see a rise in demand for reinsurance as carriers look to mitigate the impacts of the pandemic.

Furthermore, reinsurance rates are likely to rise owing to slightly weakened sector capital, says Fitch, which in turn should offset fading investment returns.

It’s worth noting that reinsurance pricing was expected to trend upwards through the mid-year renewals prior to the COVID-19 pandemic, as reinsurers look to improve profitability after a few costly years.

Some in the market have said that the COVID-19 pandemic will exacerbate any rate hardening in the reinsurance sector, so with demand expected to rise there could be an opportunity for some to take advantage of current market dynamics.

“The ultimate implications of the pandemic on global reinsurers’ credit profiles are uncertain, but the risks are skewed to the downside for companies that cannot earn their cost of capital on a sustainable basis given the long-term negative implications for their capital positions,” says Fitch.

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