Reinsurers Issued with Earnings Warning

The global reinsurance sector has been told it will fail to earn its cost of capital this year.

Fitch Ratings has undertaken its sector ratings review in the reinsurance sector and warned that underwriters will face tough trading conditions for the rest of the year and beyond.

The review warns the sector’s financial performance will be hit by mortality claims and losses from event cancellation, business interruption, credit and surety insurance, as well as by financial market disruption linked to the economic impact of lockdown measures. This follows three years of heightened natural catastrophe losses and increasing US casualty claims, which depressed reinsurers’ returns in 2017-2019.

Fitch added it had conducted a review of global reinsurers’ ratings in light of the pandemic in April and May. It assessed each insurer’s pro-forma financial metrics under a set of rating-case assumptions comparing them with the ratings guidelines defined in our Insurance Rating Criteria and with previously established rating sensitivities for each insurer.

“As a result, we took negative rating actions on six of the 22 reinsurance groups reviewed,” said the company. “There were two one-notch downgrades (with Outlooks now Stable), three affirmations but with Outlooks revised to Negative, and for one group the Insurer Financial Strength (IFS) rating was placed on Rating Watch Negative. For 15 of the groups, 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.”

It added: “Based on our pro-forma analysis, we continue to view the global reinsurance sector’s capitalisation as strong on average, with pro-forma capital ratios not much weaker than those at end-2019. We expect capitalisation to hold up in most cases and not be a major driver of rating actions.
“Primary insurance premiums may shrink in 2020-2021 due to sharp economic contraction, but we expect increased demand for reinsurance coverage from primary insurers stung by pandemic-related claims. Reinsurance prices are likely to rise as a consequence of slightly weakened sector capital, which should largely offset declining investment income due to lower interest rates.”

Fitch concluded: “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.”

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