Standard & Poor’s (S&P) recently changed its outlook for the global reinsurance sector to negative from stable, as it anticipates a number of negative rating actions and increasingly difficult business conditions for the sector over the next 12 months, according to a recent article from Guy Carpenter. S&P assigned a stable outlook to over 80 percent of global reinsurers and projects that reinsurers will not meet their cost of capital in 2020 for a third year in a row due to COVID-19 insured losses and lower investment returns. Event cancellation, mortgage, trade credit, and directors & officers and errors & omissions are perceived as the lines most sensitive to COVID-19 losses.
The majority of S&P’s rating downgrades and negative outlook changes for reinsurers were in reaction to earnings performance despite their strong capital positions. Specifically, those companies are not performing at their rating level, and/or are underperforming their peers at that rating level.
Additional factors impacting S&P’s negative outlook for the global reinsurance sector:
• Forecasts of above-normal activity during this year’s Atlantic basin hurricane season.
• Constrained alternative and third party capital and retrocession capacity.
• Reduced capital cushions; while capitalization remains robust, it is below historical levels due to the confluence of:
– Financial market volatility
– Active catastrophe years in 2017-2018 and the resulting loss creep
– Lower loss reserve releases due to adverse trends in certain casualty lines.
• Industry consolidation, which could see a pause, though secular trends remain in place.