Earnings Comment
Our take on Q1 2020 insurance earnings
The Sector went generally well prepared into the COVID-19 crisis with plenty of excess capital in its coffers. Q120 reporting of insurers is usually quite limited and the level of detail varies materially between the issuers. The Q120 earnings season was under the impression of the pandemic even though results and Solvency positions captured only the first couple of weeks of the crisis. However, the event is not life threatening for the major European insurers and underlying results remain sound. Indications by some insurers regarding the first weeks of Q220 point towards a flattening of the decline.
Strong capitalization despite COVID-19
Solvency II ratios were mostly down but far from bringing major issuers close to a Solvency event confirming the robustness of the regulatory regime. In fact, Solvency II models are calibrated to a 1-in-200 year event and COVID-19 is – as it stands now – a much more frequent one. The main impact came from the maratesque bloodbath on the equity markets and skyrocketing market volatility. Hedging programs proved to be effective while actual COVID-19 related claims are mostly earnings events but not capital events. Regulators urged insurers to suspend dividends and share buybacks in the light of the pandemic, but many insurers defied the call to retain earnings.
The Solvency II ratio decline was most severe for the likes of Generali, Unipol, Vienna Insurance Group and Aviva. Solvency II ratios of reinsurers had to pay tribute to their model conservatism but remained within their target ranges. Interestingly, AEGON and ASR reported strongly increasing Solvency II ratios as the Volatility Adjuster reached 46bp in the Solvency II models giving a strong boost to Solvency II ratios.
UK Insurers partly buffered the Solvency decline with dividend cuts and Solvency II ratio reductions look lower than their European peers do. Still, fully-loaded Solvency II positions of UK insurers (i.e. excl. transitionals) remain well below their European insurers.
Business Interruption losses due to COVID-19 still manageable
The P&L effect of the COVID-19 pandemic differed significantly between issuers and was again most prominent on the investment side, especially due to impairment losses. Bottom line results remained, however, positive in most cases. Underwriting results in the P&C business revealed generally a strong underlying performance with improving attritional loss ratios (i.e. excl. COVID-19 and catastrophe losses) and only minor changes in reserve releases confirming solid industry fundamentals. But COVID-19 claims are a major source of uncertainty. Major primary insurance groups with large industrial and commercial businesses such as AXA, Allianz and Zurich reported triple digit million losses primarily. Reinsurers followed suit with similar numbers. Lloyd’s loss estimate of GBP2.5-3.5bn shocked the market, but we expect that most syndicates that come under pressure will be recapitalised by their owners.
The largest losses came from event cancellation (e.g. Tokyo Olympics, EURO2020). Business interruption due to a pandemic is generally not covered by standard policies but claims incurred in large non-standard policies. However, in some cases such standard policies with less clear wordings are challenged in court. Most prominent examples are to be found in the UK and insurers such as Hiscox or Aviva have the highest potential exposures. The former has now eased concerns with a rights issue and for Aviva we do not expect the downside risk to be worrying. In some jurisdictions such as Germany, insurers made ex-gratia payments to policyholders following political pressure which amounted only to a fraction of the original claims. Interestingly, almost all COVID-19 loss estimates assumed that lockdowns will end in Q220.
Lastly, Motor insurers are likely to benefits from lower claims frequency as COVID-19 reduced road traffic. Some primary insurers have reported 30-70% lower frequency but this has not filtered down to the Q120 P&L and will become visible Q220. We expect that the majority of insurers will return these gains to a large extent to policyholders through rebates.
In Life&Health, COVID-19 related claims have not reached a level of concern. While the number of deaths is tragic, mortality is disproportionally high among older people, a cohort with usually very limited mortality cover. In longevity business, we did not see any reserve releases in Q120 due to COVID-19. New business margins have dropped in Q120 thanks to the turmoil on the capital markets.
Outlook
Following the relatively high business interruption and event cancellation claims to date we expect only limited potential for loss creep in industrial and commercial lines in the short term. The European insurance sector is likely to remain robust and relatively well capitalised, even if Lockdowns in the major economies remain in place longer than the insurers anticipated.
Kind Regrads
Your Plenum-Team