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AM Best forecasts hit to insurer capital from equity exposures

20th April 2020 - Author: Matt Sheehan

AM Best has predicted that re/insurers could see their capital and surplus hit as a result of sharp equity market declines caused by the coronavirus (COVID-19) pandemic.

The rating agency added that surplus losses could exceed those experience in the 2008 to 2009 financial crisis.

Analysts observed that the 20% decline in the Dow Jones since the end of 2019 is already hurting insurers’ balance sheets.

At the height of the financial crisis last decade, the stock market dropped 50%, which led to the property and casualty (P&C) industry reporting $55 billion in unrealised losses on unaffiliated stock investments in 2008,

The life/annuity segment similarly reported more than $23 billion and the health segment nearly $4 billion at this time.

According to AM Best, these losses contributed to capital and surplus declines of 11.9% for P&C insurers, 5.6% for life/annuity writers and 7.8% for health insurers.

“Significant unrealized losses and their adverse effects on capital because of the COVID-19-led downturn and economic fallout may well be on the horizon for U.S. insurers,” AM Best warns in a new report.

Currently, analysts believe the P&C segment has the highest exposure to unaffiliated common stock, at almost 18% of invested assets in 2018, versus 12% in 2009.

For comparison, the health segment’s exposure now is approximately 9%, while the life/annuity segment has maintained an exposure of approximately 1%.

AM Best added that the P&C segment also has the greatest share of companies with an unaffiliated common stock exposure equal to more than half their capital, with these companies likely to see the greatest hit to capital.

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