Improvements in the capital markets in the third quarter of this year would help reinforce the capital position of the (re)insurance industry, according to Kroll Bond Rating Agency (KBRA) in its quarterly (re)insurance insights report.
However, the agency does not believe that global reinsurers’ capital will rebound to 2019 levels by year-end 2020 despite pricing momentum observed in renewals this year as well as a flurry of debt issuance in recent months.
Aon had reported that traditional reinsurers’ capital fell around $31bn as of the end of 1Q2020, mainly due to the COVID-induced economic disruption and lockdown measures that impacted the fair value of reinsurers’ investment portfolios.
After a strong capital market recovery in the second quarter of this year, Aon then reported that nearly $20bn in capital was regained by traditional reinsurers while alternative capital remained at $91bn.
From an earnings perspective, KBRA said that sizeable reserves for potential COVID-related losses resulted in net losses and elevated combined ratios in the period through 2H2020.
The agency noted that the final claims cost from the pandemic is uncertain as events are unfolding and many coverage issues have yet to be resolved.
At the same time, investment yields continue to hover around post-global financial crisis lows due to the impact of interest rate cuts and liquidity infusions by central banks to stabilise the capital markets following the onset of the pandemic.
KBRA therefore believes that the combination of increased losses and decreased investment income will further constrain reinsurer capital growth for the remainder of the year.
Despite the dynamics resulting from the pandemic, reinsurers continued to meet demand from ceding companies through the mid-year renewals although with changes in structure, peak zone capacity as well as terms and conditions (most notably a mandatory pandemic exclusion).
Moving forward, it is expected that reinsurers will continue to deploy their capital judiciously at the upcoming January 2021 renewals in order to further strengthen capital positions by improving risk-adjusted pricing, according to KBRA.