27 May 2020Insurance

Reinsurers will grapple to earn cost of capital in 2020, warns Fitch

The global reinsurance sector will fail to earn its cost of capital in 2020 amid the coronavirus crisis, according to a review conducted by Fitch Ratings in light of the pandemic.

The report stated that financial performance of reinsurers 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 said.

Fitch conducted a review of global reinsurers' ratings in April and May, resulting in negative rating actions on six of the 22 reinsurance groups reviewed. The main driver for the negative rating actions was deteriorating financial performance, it said.

Based on its pro-forma analysis, Fitch views the global reinsurance sector's capitalisation as strong on average, which will hold up in most cases and not be a major driver of rating actions, with pro-forma capital ratios not much weaker than those at end-2019.

However, primary insurance premiums may shrink in 2020-2021 due to sharp economic contraction, but Fitch expects 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 said: "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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