Reinsurers on Thin ice Warns S&P

Global reinsurers are set to fail to hit the targets set by rating agency Standard & Poor’s and as such the firm has revised its sector outlook to negative.

In a new report the firm said reinsurers were increasing walking further out onto thin ice as the impact of the pandemic continues to bite. It added it expected there would be downgrades for those reinsurers for which the claims arising from the pandemic and the upcoming hurricane and typhoon become a capital event.

Pandemic-related losses, combined with volatile capital markets, and lower investment returns, will likely prevent the global reinsurance sector from meeting S&P Global Ratings’ earnings expectations for 2020 added the report.

“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 added its assumption is the global reinsurance sector will deliver a combined ratio of 101%-105% in 2020, or more if global insured COVID-19 losses accelerate beyond $30 billion for the wider re/insurance sector.

Therefore, it has been revising its sector outlook for global reinsurance to negative from stable, “as we believe business conditions are becoming increasingly more difficult”.

“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 capitalisation over the next 12 to 24 months, as well as for those reinsurers that entered 2020 with an already historical weaker operating performance,” said S&P Global Ratings credit analyst Taoufik Gharib.

That said, S&P acknowledged property/casualty reinsurance pricing is hardening, life reinsurance earnings remain stable so far, and capital for the sector remains robust, though lower, than at year-end 2019.

The report added: “When it comes to the reinsurance sector’s profitability, S&P Global Ratings considers this to be more akin to an endurance race than a 100-meter sprint,” added the report. “For that reason, we focus our analysis on the longer-term view of profitability relative to the cost of capital rather than a snapshot at a single point in time, as the nature of business can result in elevated losses for any given year.

“In the past three years, the sector has struggled to earn its cost of capital due to large natural catastrophe losses and generally fierce competition among reinsurers exacerbated by alternative capital.

“The coronavirus pandemic, with rising property/casualty(P/C) reinsurance claims and falling investment returns, will mean that 2020 will probably be a tough year for global reinsurers. As a consequence, we believe the sector’s ability to earn its cost of capital in 2020 has visibly reduced, to almost negligible, bearing in mind the sector still faces the North Atlantic hurricane and Pacific Typhoon seasons, with the cost of capital having risen in first-quarter2020.

“Including our assumptions for 2020, we believe 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.”

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