European reinsurers resilient – but big four will see earnings hit: Fitch

European reinsurers showed "capital and liquidity resilience" in a coronavirus pandemic stress test conducted by Fitch Ratings, but the agency warned of negative impact on their financial earnings in the short term.

Fitch conducted reviews of all four major European reinsurers, namely Hannover Re, Munich Re, SCOR, and Swiss Re, in light of the risks and uncertainties related to the global coronavirus pandemic.

All the companies showed a "resilient capital position", according to Fitch, scoring ‘Very Strong’ as measured by its Prism Factor-Based Capital Model (Prism FBM), based both on reported numbers as of end-2019 and pro-forma numbers.

Liquidity also remained strong as the companies have no mandatory debt maturities in 2020 and 2021 and all four reinsurers can draw on unused bank lines or letters of credit if needed, it said. Additionally, investment portfolios remain highly liquid so Fitch does not expect any liquidity squeeze should claims payments rise.

The first quarter 2020 results of these four major reinsurers do not yet show the full impact of the coronavirus crisis as event cancellations led to the vast majority of claims.

Fitch believes that claims in credit & surety typically show a time lag and might only peak in 1H21, while business interruption claims may come through later if legislation enforces a policyholder-friendly interpretation or even retrospective changes to policy wording.

The ratings agency expects the financial earnings of these reinsurers to be affected negatively in the short term due to claims arising from higher mortality, event cancellations or credit and surety defaults, while the mid-term impact of the pandemic may be largely neutral.

Fitch believes that the prices for reinsurance coverage will move higher, as lower available reinsurance capital will coincide with an increasing demand. Higher margins may largely offset lower investment income due to falling interest rates.