Having struggled with sector results over the last three years, the global reinsurance sector is going to fail to earn its cost of capital in 2020, according to rating agency Standard & Poor’s.
S&P maintained its negative credit outlook for the global reinsurance sector today, saying that “we expect to take additional negative rating actions on reinsurers over the next 12 months.”
The rating agency forecasts a combined ratio of 103%-108% in 2020 and 97%-101% in 2021, with a return on equity (ROE) of 0%-3% and 5%-8%, respectively.
Driving the decline this year and potentially into the next, is the impact of the COVID-19 pandemic, which S&P said has cost the reinsurance market around $12 billion in losses to-date.
With significant uncertainty over the potential for future losses and second-waves, S&P is working off an estimate of insured COVID-19 losses in a range from $35 billion to $50 billion, which it says adds 6-8% of property/casualty losses for 2020 to the combined ratio of the top 20 global reinsurers.
Currently 17% of the top 40 reinsurance companies in the world, by S&P’s reckoning, are on a negative credit rating outlook.
Average cost-of-capital sits at around 7.2% for 2020 so far, with this metric relatively static over the last decade on average, but return on capital sits at a low 2.1% for the first-half of this year, across the reinsurance market, and with the average return of instruments such as treasuries at all-time lows, the ability to earn returns on the investment side are minimised.
All of which makes for a challenging reinsurance outlook, despite the ongoing hardening of renewal rates.
Mitigating all of this are the facts the sector has not experienced significant capital destruction and has been able to raise capital since March, while at the same time property and casualty pricing is on the rise across much of the marketplace.
Catastrophe losses, pandemic losses, alternative capital and retrocession capacity constraints, all add impetus to the rate environment and S&P says, “We expect the positive price momentum will carry into 2021 supporting top line growth against the economic downturn.”
On the life reinsurer side, the rating agency warns that they “are facing higher mortality losses caused by the pandemic, but the impact is manageable.”
S&P said that it could turn its credit outlook for reinsurers to stable if they can earn their cost-of-capital, but the rating agency said this isn’t expected until 2021 at the earliest.