With global insurers and reinsurers soon to announce their first-quarter 2020 results, analysts at S&P Global Ratings expect the impacts of the COVID-19 pandemic to hit the earnings of U.S. life, health, and property/casualty (P/C) insurers.
Overall, analysts expect that the investment performance of U.S. insurers will take more of a hit from the pandemic than the underwriting side when companies announce their results for the quarter.
For P/C insurers, S&P believes that the underwriting performance during Q1 2020 will be the least affected of the three sub-sectors from this coronavirus outbreak, but warns that for the remainder of the year, there’s potential for claims escalation and analysts are keeping an eye on legislative efforts in the region to force the retroactive cover of business interruption.
“Underwriting performance should be in line or better-than-expected for the majority of P/C insurers because of recent premium rate actions and a relatively benign loss environment this quarter,” says the ratings agency.
However, following the outbreak of COVID-19 financial market volatility has been significant and equity markets have suffered, resulting in some steep share declines. As a result, S&P warns that although P/C insurers’ underwriting performance should remain strong in Q1, companies’ investments might take a hit.
“While first-quarter results will not tell us the extent of underwriting performance volatility stemming from COVID 19, there is perhaps more certainty on capital and income affected by the record market volatility in March 2020,”says S&P.
Turning to the U.S. health insurance space, and analysts again anticipate seeing better-than-expected underwriting results during the first-quarter of the year, driven by a deferral of non-emergency medical services which is expected to more than offset COVID-19-related medical claims.
However, uncertainty and risk remain for the rest of 2020 as levels of unemployment rise, while the potential for a second wave of the outbreak or a failure in containment efforts can have a seriously negative impact on the sector’s earnings moving forward.
In its report, S&P says that underwriting income is expected to continue to be the primary earnings driver for U.S. health insurers, but warns that impairments to investments can damage earnings as well.
“However, at this time, we expect improved underwriting earnings to more than offset any investment impairments in the first quarter,” say analysts.
For the U.S. life insurance sector, analysts expect that the lower interest rate environment and volatile equity markets during the first-quarter will provide a test of insurers’ hedging frameworks and their market-sensitive liabilities.
Analysts at S&P believe that the majority of firms will pass this test as many improved their hedging strategies in the aftermath of the 2008 financial crisis.
“But this crisis will undoubtedly showcase any weaknesses in an insurer’s hedging framework. Insurer’s that didn’t buy adequate protection from an equity downturn or lower rate environment may see negative charges for their market-sensitive liabilities, although the magnitude of those, especially in the first quarter, remains to be seen,” says S&P.
So far, it appears that the ongoing COVID-19 coronavirus pandemic is expected to have a limited impact on the underwriting performance of U.S. insurers during the first-quarter of the year. However, investments are expected to take a hit although this will vary by company.
As the market moves through 2020 the outlook remains uncertain and challenging, and will be influenced heavily by the duration and severity of the global COVID-19 pandemic and the response of market participants.
