COVID-19 market volatility tests North American reinsurers' resilience

Analysts at S&P Global believe that although the spike in market volatility caused by COVID-19 is testing North American reinsurers' resilience, most companies are able to maintain their capital adequacy in line with their ratings so far.

S&P Global Ratings conducted its investment assets stress tests for the North American (Bermuda, Canada, and the US) reinsurers, in view of current heightened market volatility.

The results show that even those that have felt the pinch and saw capital adequacy dip and become deficient, as of year-end 2019 on a pro forma basis, will likely be able to replenish their capital over the next two years.

North American reinsurers are carrying thinner capital buffers relative to the past few years because of the current financial market turmoil, according to S&P. Therefore, those with riskier investment strategies and outsize natural catastrophe exposure could be further exposed if 2020 ends up being an above-average catastrophe year, which any additional drops in market values could exacerbate.

"If the COVID-19 pandemic becomes a capital event rather than an earnings event for the few negative outliers, we will likely take rating actions if we believe that they won't be able to rebuild their capitalization through earnings retention and capital management strategies over the next 12 to 24 months," said S&P Global Ratings credit analyst Taoufik Gharib.

"We believe that in such times, prudence in capital management strategies is key," he added.