AM Best to Test Insurers for Coronavirus Impact; Fitch Lowers Allstate Outlook

March 18, 2020

Ratings firm AM Best said it is developing stress testing that it will conduct on its rated insurance companies’ balance sheets to gauge the impact of the COVID-19 virus fallout on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities.

Meanwhile, Fitch Ratings downgraded its outlook for Allstate from positive to stable citing uncertainty the coronavirus pandemic creates in the life insurance business.

Fitch said it blames, in part, the financial market volatility created by coronavirus, as well as the resulting plunge in interest rates and “significant” variabilities in stock, bond and derivative prices. Allstate has a significant life insurance business as well as its property/casualty insurance operations, and Fitch said life insurance could be particularly problematic as the coronavirus pandemic evolves.

“Life insurers, which include Allstate’s core life insurance subsidiaries, are also exposed to spikes in mortality,” Fitch said in its outlook change announcement. What that means is financial market instability combined with life insurance exposure “will likely create some pressure on earnings and variability in capital in capital levels, the severity and duration of which is impossible to predict at this time,” Fitch said.

At the same time, Fitch affirmed existing ratings for the company, including the “A+” financial strength ratings it has for Allstate and its subsidiaries.

Fitch previously said that it does not expect the coronavirus outbreak to have a meaningful adverse impact on financial results reported by U.S. property/casualty companies, nor their ratings. The nature of insured commercial exposures along with restrictive language in policies will likely limit U.S. P/C carriers from a material level of claims, Fitch analysts said. The most notable and immediate financial impact will be fluctuations in capital levels for companies with large common stock holding, given recent market downturns tied to the virus.

AM Best Life Outlook

On March 16, 2020, AM Best revised its U.S. life/annuity industry’s market segment outlook to negative.

On March 18, in announcing it would develop a coronavirus stress test, AM Best said the COVID-19 virus is “unique in its scope and complexity of potential losses, and the uncertainty regarding the near-term impacts further exacerbates the situation.” Consequently, the ratings agency said, “direct and indirect effects of the outbreak may not be understood fully for some time.”

AM Best said it conducted stress tests of this nature after Sept. 11 and the Eurozone crisis. In the United States, AM Best said current economic conditions are seen as more likely to affect the balance sheets of life/annuity insurers than those of property/casualty or health insurers.

AM Best said it believes the insurance industry is more resilient today to financial market downturns than it was during the 2008-2009 financial crisis, which put heavy attention on liquidity risk, and that it expects its rated companies will be able to meet their commitments, despite the rapidly evolving situation. With these coming stress tests, access to liquidity, as well as the laddering and maturing of debt securities within the capital structures of insurance companies, will be additional areas of focus.

AM Best said it will delay by one month its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ) to May 1, 2020, through its client portal. It will also issues a questionnaire to determine how carriers’ operations have been affected by the pandemic, which lines of business they expect to be negatively impacted most or if they expect any overall assumptions or forecasts to change. AM Best also will seek results of each organization’s own stress tests, which are typically considered in the assessment of each rating unit’s enterprise risk management framework.

Moody’s Investors Services earlier this month said an economic slowdown triggered by the outbreak will crimp business volumes for insurers and also lead to higher claims for certain types of insurance, including trade credit and event cancellation insurance. Moody’s said it also expects weaker investment returns on insurers’ investment portfolios, including loses on equity exposures.

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