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Thin ice: S&P lowers reinsurersí outlook to negative

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S&P has lowered its outlook on global reinsurers to negative from stable, saying COVID-19 has pushed the sector “farther out on thin ice”.

The global reinsurance sector is facing “historically unusual times” where a single event – the pandemic – is materially disrupting both the asset and liability side of their businesses, S&P’s says.

“There are not many places that provide respite,” its latest report on the sector agency says.

COVID-19 related losses in the first-quarter added an average 10 percentage points to the combined ratio for the sector, S&P estimates. Coupled with investment losses, this dropped the sector's return on capital to about 3.5% in first-quarter 2020 from 7.4% at the end of 2019, while the cost of capital increased.

The ratings agency calculates reinsurers will have failed to earn cost of capital three times within 2017-2020 – the worst sequence of results in the past 15 years. The sector will not earn its cost of capital before next year at the earliest, S&P says.

“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 meteorological forecasts of above-normal activity during this year's Atlantic hurricane season and expectations for additional COVID-19 related losses, reinsurers have less room to absorb major natural catastrophes, the ratings agency says.

S&P revised its 2020 aggregate combined ratio expectation for the top 20 global reinsurers to 101%-105%, assuming these companies bear around 30% of insured COVID-19 losses.

“We see downside risk to our expectations. We estimate a two-point hit to the aggregate combined ratio for the top 20 global reinsurers for every $10 billion increment in COVID-19-related insured losses.”

S&P notes that reinsurance profitability is “more akin to an endurance race than a 100-metre sprint,” and disciplined underwriting and risk pricing, tighter terms and conditions with clear exclusions, and overall proper risk management will be key if reinsurers are to preserve earnings and capital strength.

It says COVID-19-related claims in property and casualty reinsurance are rising and started to negatively affect reinsurers in the first quarter. These losses mainly include event cancellation claims such as postponement of the Tokyo Olympics and the cancellation of other large sporting events, and to a lesser extent business interruption, directors’ and officers’, credit, and travel.

The ratings agency’s economists predict a global economic contraction of 2.4% this year before a rebound to growth of 5.9% next year.