Fitch Sees Little Stress on Insurer Ratings From Pandemic. Thus Far.

By | May 14, 2020

Having reviewed 70% of all of the North American insurers it rates for the effects of the coronavirus and economic downturn, Fitch Ratings has affirmed the ratings of 72% of the carriers with stable outlooks. Only 4% have been downgraded.

About 20% have been affirmed with negative outlooks, while 4% have been kept on ratings watch.

There is no reason to think that the remaining 30% of insurers yet to be reviewed won’t fall in line with what has been reviewed to date. “I think generally the results would be somewhat similar to what you’ve seen thus far,” said Julie Burke, North American head, Insurance Ratings for Fitch.

At the same time, she stressed that this is “an unprecedented economic contraction, the speed and depth of which we’ve never seen in our lifetimes,” she said. “It is hard to relate this to previous cyclical downturns and makes it very difficult to predict how it will play out. There remain significant uncertainties and we are in the early innings.”

In the property/casualty arena, Fitch has reviewed 80% of its clients and has not issued any rating downgrades. Most ratings have been affirmed with stable outlooks. The rating of just one carrier was changed from positive outlook to stable while two were changed from stable to negative outlook.

Fitch Ratings Assumptions Behind Its Coronavirus Reviews of Insurers

  • Decline in key stock market indices by 35% relative to Jan. 1, 2020.
  • Increase in two-year cumulative high yield bond default rate to 16% in the U.S. and 13% in Europe. Assumptions for other countries will fall within these ranges. The default rate assumptions will be applied to current non-investment grade assets, as well as a portion of ‘BBB’ assets.
  • Both upward and downward pressure on interest rates, with spreads widening (including high yield by 400 basis points) coupled with notable declines in government rates.
  • Capital markets access is limited for issuers at senior debt levels of ‘BBB’ and below.
  • A COVID-19 infection rate of 5% and a mortality rate (as a percent of infected) of 1%.
  • For the non-life and reinsurance sectors, a negative impact on the industry-level accident year loss ratio from COVID-19-related claims at 3.5 percentage points, partially offset by a favorable impact from the auto line averaging 1.5 percentage points.

Jim Auden, managing director of the P/C insurance sector for Fitch, said P/C insurers appear to be better positioned than life insurers to handle the effects of the pandemic in the near term, in part due to their having come off a strong 2019 with record capital levels, the continuation of mostly positive commercial lines pricing trends, and their being less vulnerable to investment market volatility.

He also said companies “appear more optimistic that COVID-19 related loss uncertainty will sustain pricing in the near term in both insurance and reinsurance markets.”

In the area of investments, Auden said some P/C insurers are being affected, with companies with significant equity allocations in their asset portfolios experiencing the greatest quarterly declines.

As for underwriting losses, P/C carriers will have some time before they start feeling the real effects of claims, according to Auden. The first quarter combined ratio was up approximately half a point from the prior year quarter to 95.

For many companies, the first quarter was too early to fully estimate losses. He estimated that insurers overall reported about $4.1 billion of incurred losses related to the pandemic in the quarter, largely related to event cancellation, travel coverage and business interruption.

Companies differ as to whether COVID-19 claims are considered catastrophe related losses, he added.

“All in, the first quarter probably led to a few more questions than the answers regarding company underwriting exposures to COVID-19,” he commented.

He expects to see claims for business interruption, workers’ compensation, cyber and liability lines including directors and officers emerge.

Auto insurers, on the other hand, in the near term could see a positive claims effect but over time may see premiums volume suffer as a result of fewer miles being driven.

“The situation is fluid,” he said, adding that Fitch still views the pandemic as essentially an earnings, and not a capital, event.

Going forward, Auden will be looking out for unfavorable consequences including claims that make take a while to surface and that could make some companies “incrementally more vulnerable to other natural catastrophes.”

He is also watching legislative and judicial actions that might affect business interruption coverage and that could result in potentially large losses.

He said it’s unclear how the business interruption controversy will play out. “We presume that the physical damage requirement will largely hold but policies are different and we’ve seen reported claims already,” he said, noting that there are some manuscripted and specialized policies.

The second quarter results should provide more information, he said.

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