The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
Amid the coronavirus pandemic and its toll on the insurance industry, the world’s major reinsurers haven’t come out unscathed – and now, there’s more competition on the horizon as a new private equity-backed reinsurer enters the space.
In April, when the pandemic had already spread to every major market and brought widespread government shutdowns, Munich Re withdrew its profit guidance for the year as a result of significant insurance claims triggered by the cancellation of large events. It stated that claims within its property and casualty reinsurance segment caused it to anticipate profits in the low three-digit-million euro range for the first three months of 2020, according to Reuters.
Then, when the numbers for Q1 2020 were finally revealed, the reinsurer reported potential losses of up to €800 million (around NZ$1,360 million) from the coronavirus pandemic. In Q2, the bad news kept coming, with Munich Re sharing that second quarter earnings that had been impacted so heavily by the COVID-19 pandemic, that it put off a planned share buyback.
The experience of Munich Re during this time wasn’t unique in the reinsurance industry. In the first half of 2020, the group of 17 reinsurers tracked by Fitch Ratings – featuring the European “Big Four”: Swiss Re, Munich Re, Hannover Re, and SCOR – shifted to an underwriting loss, posting a reinsurance combined ratio of 105.8%, compared to 94.5% in the first half of 2019.
Nonetheless, Fitch also noted that the “Big Four” generally maintained capital adequacy, keeping their solvency ratios above 200% and well within pre-established target ranges. In this vein, Swiss Re recently reported that it’s navigating the pandemic with a proactive reserving approach and a strong balance sheet, and expects the normalised combined ratio in property & casualty reinsurance (P&C Re) to improve to ≤ 96% in 2021, supported by positive rate momentum.
There will, however, continue to be challenges for reinsurance, which is why Fitch has kept its outlook for the global sector negative for 2021. Alongside growing losses from the pandemic, reinsurers are feeling the weight of a global economic contraction on premium volumes and ultra-low interest rates. Reinsurers also have to fear an extreme catastrophe event or a further deterioration of the coronavirus crisis, which could put more pressure on their financial performances. This fear isn’t unfounded since 2020 has seen its share of natural disasters, with the hurricane season in the US being the second most active on record, while parts of Asia deal with a deadly typhoon season.
Moreover, in the midst of this pandemic-laden environment, a new entrant to the marketplace could put reinsurers on their toes. Earlier in November, Canadian private equity firm Brookfield Asset Management announced that it would be launching a reinsurance company, Brookfield Asset Management Reinsurance (BAM Reinsurance), to cover for the billions of dollars of payments owed by American Equity Investment Life Insurance (AEL), in which Brookfield owns interest.
Brookfield’s move follows the trend of major publicly traded private equity firms’ continued investments in re/insurance companies. For instance, in June 2020, the Carlyle Group completed its acquisition of Fortitude Re, and, according to research firm PitchBook, it predicts the deal will bring $4 billion into its funds in the near-term. More broadly, Fitch Ratings reported that an estimated $5 billion or more in new equity funds had been raised in the summer and spring of 2020, and “additional tie-ups with PE companies and side cars are expected to be utilised to raise and deploy capital and scale existing reinsurers.” These deals make for a competitive marketplace, especially as reinsurers focus on seeking out capital during a loss-filled year.
As a result, as the year comes to a close and renewals are just around the corner, reinsurers are not exactly on solid ground. Experts have noted that there could be more pandemic-related losses down the line, in casualty lines in particular, the scale of which are hard to predict, making the current environment an uncertain one for the re/insurance industry on the whole.
S&P Global Ratings has noted that “a potential rise in corporate defaults will hit directors’ and officers’ policies, which have already been affected by claims inflation in recent years,” while in business interruption and aviation, “the impact will vary by region and depend on policy language,” noting that in the US, there could be legislative attempts to retroactively expand insurance contract coverage.
While the rating agency predicts that these would be unsuccessful, outside the US, the environment is more challenging, as “there is an element of uncertainty about whether business interruption claims will be triggered and covered by re/insurers and may be subject to legal proceedings, particularly for policies with less definitive wordings around pandemic coverage.” The recent rulings in the UK and Australia have shown these worries to be well-founded.
Thus, while some reinsurers are confident in the strength of their balance sheets as the new year approaches, the industry will likely be contending with uncertainty for some time to come.