Initial results from US insurers suggest that COVID-19 claims costs are tailing off sharply rate rises in commercial lines, as well as in reinsurance, represent a very sharp and unrecognised margin improvement.
Berenberg analysts sees this as a compound benefit to earnings growth, as it means that the earnings shortfall from COVID-19 claims is likely to be contained mainly within 2020.
As a result, earnings will benefit from the higher prices and margins that were booked in 2020 and the conservative reserving being done now will lead to higher reserve releases later.
However, Berenberg’s analysts consider the market to still be discounting headwinds and those that over-estimate them could be caught short when the European reporting season starts for the companies that are most affected.
The most important news from the US is seen as the fact COVID-19 claims are tailing off, because these claims are the biggest concern and pushback for investors today.
Analysts say this concern is summarised by whether or not Munich Re will miss its 2021 earnings target due to COVID-19.
Supposedly the clearest data that COVID-19 claims are tailing off is from Chubb, which on 3 February reported that it had not changed its $1.365bn pre-tax COVID-19 claims estimate since Q2 2020,.
Berenberg’s forecast for strong profit improvement through to at least 2022 reflects three factors.
Firstly, the earnings that stem from pricing in insurance come with a six- to 18-month lag. Therefore, the rate rises of 16.5% in the US and 18.5% outside of the US, cited by Chubb, will continue to filter through to 2022.
Secondly, pricing remains strong, which means there is more margin improvement to come. And thirdly, reserving is extra-cautious, which means that the buffers created now will lead to reserve releases in FY 2022-23.