Reinsurers globally will lose money in 2020, a reality Standard & Poor’s said COVID-19-related losses stand to make worse.

What’s more, the level of red ink could worsen substantially depending on the height of coronavirus pandemic losses in the months ahead.

Due to that uncertainty and “increasingly more difficult” business conditions, S&P revised the sector’s outlook to negative from stable.

“Once again, the sector will not earn its cost of capital this year, bearing in mind it has struggled in the past three years to do so due to large natural catastrophe losses and fierce competition,” S&P Global Ratings credit analyst Johannes Bender said in S&P’s new report on the matter.

S&P noted that reinsurers have struggled to earn their cost of capital over the past three years, thanks to large natural catastrophe losses and heavy competition. COVID-19 added further pressure, it said.

S&P blames pandemic related losses along with volatile capital markets and lower investment returns for preventing reinsurers from meeting S&P Global Ratings’ earnings expectations for the year. With those pressures in play, S&P said the global reinsurance sector will likely produce a combined ratio between 101 and 105 in 2020. The number could go higher if global insured losses go beyond $30 billion for the wider insurance/reinsurance sector, S&P said.

There’s some risk that the loss number could keep climbing. S&P said that COVID-19 related losses in the 2020 first quarter added 10 additional percentage points on average to reinsurers’ combined ratios. Turmoil over COVID-19 also led to investment losses, which dropped the sector’s return on capital to 3.5 percent in Q1 2020, down from 7.4 percent at the end of 2019, S&P said.

S&P warned it would take negative rating actions on reinsurers “whose COVID-19 losses wipe out their earnings” and are bad enough to prevent rebuilding of capitalization over the next 12 to 24 months. Reinsurers who began 2020 with “an already weaker operating performance” are also susceptible to negative ratings actions, S&P added.

Standard & Poor’s full report is: “COVID-19 Pushes Global Reinsurers Farther Out On Thin Ice; Sector Outlook Revised to Negative.”

Source: Standard & Poor’s