The global reinsurance sector will fail to earn its cost of capital in 2020 amid the coronavirus crisis, which will help maintain reinsurance price increases during the year ahead, said Fitch Ratings.

Financial performance will be hit by mortality claims and losses from event cancellation, business interruption, credit and surety insurance, as well as by financial market disruption connected to the economic impact of lockdown measures, said Fitch in a report titled “Global Reinsurance Sector Will Not Earn Cost of Capital in 2020.”

This follows three years of higher natural catastrophe losses and increasing U.S. casualty claims, which have depressed reinsurers’ returns during 2017-2019, the ratings agency added.

But there are some positive trends ahead for reinsurers, the report indicated.

While primary insurance premiums may shrink during 2020 and 2021 due to wide economic contraction, Fitch expects there will be higher demand for reinsurance coverage from primary insurers hit by pandemic-related claims.

In addition, reinsurance prices are expected to rise as a result of “slightly weakened sector capital, which should largely offset declining investment income due to lower interest rates,” the report said.

Fitch said it conducted a review of global reinsurers’ ratings during April and May in light of the coronavirus crisis, assessing each insurer’s pro-forma financial metrics. As a result, it took negative rating actions on six of the 22 reinsurance groups reviewed.

There were two one-notch downgrades (with outlooks now stable), three affirmations (with outlooks revised to negative), and one group had its Insurer Financial Strength (IFS) rating placed on rating watch negative.

For 15 of the groups, the IFS ratings were affirmed with stable outlooks, and for one group, the IFS rating watch evolving was maintained. The main driver of the negative rating actions was deteriorating financial performance, said Fitch.

Fitch continues to view the global reinsurance sector’s capitalization as strong on average, with pro-forma capital ratios not much weaker than those at year-end 2019. “We expect capitalization to hold up in most cases and not be a major driver of rating actions,” affirmed Fitch.

The ultimate implications of the pandemic on global reinsurers’ credit profiles are uncertain, Fitch noted, “but the risks are skewed to the downside for companies that cannot earn their cost of capital on a sustainable basis given the long-term negative implications for their capital positions.”