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In This List

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A Look At U.S. Life Insurers' $4.5 Trillion Investment Portfolios Amid COVID-19

What To Expect When U.S. Insurers Report Second-Quarter Results Amid COVID-19 Pandemic

S&P Global Ratings expects to see a greater impact from the COVID-19 pandemic on U.S. insurers' financial statements in the second quarter of 2020 versus the first-quarter. The infection rate and deaths related to COVID-19 have grown significantly in the second quarter. The shutdown of businesses were also more pronounced. "Fallen angels"--issuers downgraded to speculative grade ('BB+' or lower) from investment grade ('BBB-' or higher)--within insurers' bond portfolios will have increased, while bond market spreads tightened and equity markets rebounded during the quarter.

For U.S. life insurers, we expect an increasing divergence in second-quarter results based on individual insurers' investment allocation and product risks, with the overall sector experiencing somewhat higher impairments and lower returns in investment portfolios, and increased mortality claims in their life insurance businesses. Somewhat offsetting this would be better-than-expected results in the accident and health and long-term care (LTC) lines.

For U.S. P/C insurers, we expect to see a high degree of variability in underwriting results as elevated catastrophes, civil unrest, and initial COVID 19-related loss estimates hit firms' bottom lines. Offsetting these adverse operating developments are unrealized gains and investment income stemming from the recent market rebound of first-quarter losses.

For U.S. health insurers, we anticipate a very strong quarter with lower utilization from deferral of nonemergency and elective care more than offsetting COVID-19-related claims. We also expect a changing membership mix for health insurers with higher payroll unemployment reducing group/employer-based membership, along with an uptick in Medicaid members.

Framing The Quarter: Mortality, Morbidity, And Capital Markets Through July 20, 2020

COVID-19 attack/infection rate: 0.8% as of June 30, 2020

After ending the first quarter with about 186,000 reported cases (0.1% of the U.S. population), the second quarter saw a sharp increase, with 2.6 million reported cases (or 0.8% of the U.S. population) as of June 30, 2020. Since the end of the quarter, reported cases have risen further with more than 3.7 million reported as of July 20, 2020.

Chart 1


COVID-19 mortality: 0.4 excess deaths per 1,000 as of June 30, 2020

In line with the sharp growth in reported cases, COVID-19-related deaths also increased in the second quarter. As a matter of fact, 97% of pandemic-related deaths during the first six months of 2020 took place in the second quarter. After crossing the 100,000 mark at the end of May, the quarter ended with over 126,000 reported deaths related to COVID-19. And the number has kept rising and now stands at over 140,000 deaths.

Table 1

COVID-19-Related Deaths Compared With All Deaths
Week ending date in which the death occurred* All deaths involving COVID-19 (U07.1)§ Deaths from all causes COVID-19 deaths as % of all deaths
2/1/2020 0 58,317 0.00
2/8/2020 1 59,060 0.00
2/15/2020 0 58,300 0.00
2/22/2020 5 58,259 0.01
2/29/2020 5 58,479 0.01
3/7/2020 34 58,638 0.06
3/14/2020 52 57,669 0.09
3/21/2020 561 58,505 0.96
3/28/2020 3,126 62,474 5.00
4/4/2020 9,906 71,637 13.83
4/11/2020 16,011 78,322 20.44
4/18/2020 16,895 75,988 22.23
4/25/2020 15,206 72,866 20.87
5/2/2020 12,965 68,068 19.05
5/9/2020 10,948 65,237 16.78
5/16/2020 8,930 62,407 14.31
5/23/2020 6,929 59,061 11.73
5/30/2020 5,838 56,299 10.37
6/6/2020 4,596 54,642 8.41
6/13/2020 3,640 52,008 7.00
6/20/2020 2,733 48,150 5.68
6/27/2020 1,363 39,349 3.46
Total deaths 119,744 1,333,735 8.98
*Data during this period are incomplete because of the lag in time between when the death occurred and when the death certificate is completed, submitted to NCHS and processed for reporting purposes. This delay can range from one week to 8 weeks or more, depending on the jurisdiction and cause of death. §Deaths with confirmed or presumed COVID-19, coded to ICD–10 code U07.1 Note: Number of deaths reported in this table are the total number of deaths received and coded as of the date of analysis and do not represent all deaths that occurred in that period. Counts of deaths occurring before or after the reporting period are not included in the table. Source: U.S. CDC, S&P Global Ratings research.
Equity markets up 25% for the quarter

Despite the greater spread of the virus during the second quarter, equity markets rebounded almost 25%. This was quite the opposite of the 20% decline that we saw in the first quarter. Market volatility also seems to be relatively lower during the quarter. The VIX (Chicago Board Options Exchange's Volatility Index) remains higher than the beginning of 2020, but well below its high of 82.69 in the middle of March.

Chart 2


Bond market spreads tightened in Q2 relative to Q1, while fallen angel risk increased

Bond spreads declined in the second quarter, especially for investment grade bonds. But they still remain higher than at the beginning of 2020. Although the low interest rates accompanied with tighter spreads are not favorable for insurers' new money investment yields, they provide an attractive cost for raising debt. U.S. insurers issued over $45 billion of debt through the first half of 2020.

Chart 3


Chart 4


Additionally, fallen angel risk remains high. Through May 2020, there have been 30 fallen angels, with more than $300 billion in rated debt. Meanwhile, the number of potential fallen angels (issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications) reached a record high of 126 globally--nearly triple January's total of 44. While there's still considerable room for more downgrades to speculative grade this year, the pace has slowed with outlook changes prevailing over CreditWatch placements indicating a less-immediate downgrade potential.

U.S. Life Insurers: Increasingly Differing Results Based On Product And Investment Profiles, But Overall Credit Quality Will Remain Intact

This pandemic-driven recession will affect both the invested assets and the insurance liabilities held by U.S. life insurers. The impact on investment portfolios may well be more pronounced as market swings and bond downgrades increase impairments. The lower-for-much-longer interest rate environment will generally result in a decline in new money yields. But, the differences in product portfolios and investment allocations among individual insurers mean that the impact will vary across the industry.

Specifically, for the second quarter, we expect to see lower or even negative returns from the insurers' alternative investment portfolios (primarily, private equity investments) hurting reported earnings. For most life insurers, there is often a one-quarter lag in reporting of alternative investment results. The effect of the weak markets in the first quarter will actually flow through most insurers' alternative portfolio results in the second. We believe there will be a divergence among insurers depending on portfolio allocation and differences in reporting this part of investment portfolios.

On the liability side, we expect to see weakened mortality performance as COVID-19-related death claims increase during the quarter. During the first quarter earnings season, several publicly traded U.S. life insurers highlighted the impact of 100,000 population deaths on their books (see appendix 1). This is another area of variance for the industry, because life insurers with more retirement products will not see the same negative mortality as those with a traditional life insurance product portfolio. Of course, the exact age and regional distribution of each insurer's policyholders will create another layer of differentiated results.

The unfortunate reality of higher-than-expected deaths during a pandemic is that some product lines with longevity risk may actually perform better. For example, we expect improved LTC performance in the second quarter due to higher deaths being reported among the older population and in LTC nursing facilities.

What do we expect for the second half of 2020?

Interest rate assumption updates, excess mortality claims, and investment impairments will remain in focus as COVID-19-related cases and deaths tick back up in July.

As of this writing, COVID-19 deaths in the U.S. have reached 140,000, and as reported cases rise again the possibility of continued death claims from the virus is very much a reality. Our mortality stress test (see, "Amid Coronavirus Outbreak, S&P Global Ratings Looks At How A Hypothetical Pandemic Could Affect U.S. Life Insurers," Feb. 14, 2020, on RatingsDirect) indicates that in our moderate stress scenario (250,000 excess deaths), we would expect a decline in capitalization that would temporarily affect capital adequacy, but wouldn't have a significant impact on credit quality for most insurers.

Interest rate assumptions underlying U.S. generally accepted accounting principles (GAAP) reserves vary considerably across U.S. life insurers (see appendix 2). The current low rate environment will only heighten the likelihood of reducing some of interest rate assumptions. For instance, Equitable Holdings lowered its rate assumption to 2.25% from 3.45% in the first quarter. We expect other life insurers to follow this trend in 2020.

We believe organic growth will remain diminished for the rest of 2020 as insurers reprice products to reflect current market conditions. An economic recession with higher unemployment will also not support a robust sales outlook. But, we expect continued opportunities for growth via mergers and acquisitions (M&A). We did see a fairly large block M&A announcement (Athene-Jackson National) in June, and we expect block M&A to remain part and parcel of the life insurance sector.

U.S. P/C Insurers: Investments Have Rebounded, But Uncertainty From COVID 19-Related Losses Remains In The Second Quarter

We anticipate a high degree of variability in underwriting results in the second quarter as insurers begin to post losses stemming from the pandemic. While we expect insurers to face tailwinds from a positive rate environment and lower frequencies for certain lines of business given shelter in place restrictions, the types of businesses and geographies an insurer writes can result in a wide range of initial estimates of COVID 19-related losses. As for investments, we expect largely a reversal of the first-quarter hits insurers took from unrealized losses in their portfolios.

What a difference a quarter makes for insurers capital positions! Equity markets saw a reversal of first-quarter losses rebounding closer to year-end 2019 levels. Since most insurers were not forced sellers, we expect many to see unrealized gains as a result, thereby reducing the losses of the first quarter. Also, companies took advantage of lower rates by opportunistically prefunding upcoming maturities and building additional capital to deploy in an accelerating hardening market. However, the lower rate environment will also affect future investment returns, putting a greater onus on insurers to generate underwriting profits and supporting rate-increase momentum.

These improved investment results will likely not carry over to the underwriting side as elevated catastrophe losses, continued social inflationary pressures, and uncertainty stemming from COVID-19 losses and civil unrest lead to a wide range of possible outcomes. We do expect insurers with large property books to experience a modest uptick in losses due to convective storm activity in the U.S. unlike the first quarter, which was relatively mild. Not even a pandemic was able to help the industry escape social inflation as litigation costs continue to rise. On top of this, insurers with older liability books could see adverse developments given reviver statutes in several states that extended the Child Victims Act facilitating increase losses after the original statute of limitations has expired. We expect insurers to see greater losses from civil unrest across the country, but we think this will mostly affect companies exposed to large urban locations and likely have minimal impact for rest of year. Trade credit and surety business are also seeing rising losses, but we think these are manageable for most diversified insurers.

Losses from COVID-19 on P/C insurers has only just begun and, based on preearning releases to date, the impact could have a wide degree of variability. We note a large portion of these losses (including legal expenses) have not actually been paid but rather are incurred but not reported reserve estimates for future payouts. So, a company's reserving strategies can greatly influence the amount initially posted. The lines of business written by an insurer can greatly affect the loss estimates because much of the impact so far has hit workers' compensation, professional liability, medical malpractice, accident and health lines, and event cancellation policies. Additionally, the geographies a company writes in is critical, since we believe the U.S. has tighter policies regarding potential business interruption claims. As a result, we expect a wide range of losses stemming from the pandemic.

It wasn't all doom and gloom in the second quarter, as all lines except workers' compensation will likely reflect rate increases in the quarter that will mitigate some of lower exposure levels from economic retraction. We anticipate many insurers to benefit from lower claims even factoring in premium rebates. We think some reduced claims volume is more a timing issue due to governmental restrictions and some of these claims will start to emerge as economy opens up. Considering all these factors, operating income for most P/C insurers will likely take a hit.

What do we expect for the second half of 2020?

COVID-19 losses and macroeconomic effects, catastrophes, and social inflation pressures will remain on our radar for the rest of 2020. The peak of the catastrophe season occurs in the second half of the year and meteorological forecasts are calling for above-normal activity in the Atlantic basin. Given rising rates and hardening of terms and conditions in the reinsurance market, some companies could face large losses if programs are materially changed.

We expect social inflationary pressures to cause a rise in litigation costs. While court closures may have slowed down some of these pressures, this may be a shift in focus towards COVID 19-claims and a similar response of the court system could result in rising costs for exposed liability lines.

We expect losses stemming from COVID-19 to be a major factor for the rest of the year, subject to significant changes as more information becomes available and companies refine loss estimates. While furloughs and fiscal stimulus allowed some small businesses to weather the storm during shelter-in-place restrictions, now as certain payments come due, some of these temporary closures and layoffs could become permanent, which will be a direct hit to premium volumes. We anticipate some of this exposure uncertainty will slightly be offset by the continued positive rate environment in the sector. As cases begin to spike across the U.S., any additional shelter-in-place restrictions would only further cloud expected premium and claims volumes. We still expect full-year results for the sector to be pressured with written premiums declining to 4%-6% with losses of 98%-102%.

U.S. Health Insurers Will Report Strong Q2 Results With Deferred Medical Services More Than Offsetting COVID-19 Claims

In contrast to the other insurance sectors, we expect U.S. health insurers to report very strong second-quarter earnings. The stay-at-home policies that were implemented during the first part of the year led to lower medical services utilization. As several providers closed nonemergency services and individuals deferred elective care procedures, the lower-than-expected medical utilization will more than offset COVID-19 claims in the second quarter.

As medical costs remain below historical levels, we anticipate to see early signs of a shifting membership mix. The employer-based/group membership will show declines as payroll unemployment level reach historic highs during this recession. Somewhat offsetting this, we expect an increase in managed Medicaid enrollment partly due to recently uninsured who are eligible signing up for Medicaid, but mostly because the states have halted their respective redetermination processes. The shift in business mix will hurt margins for some insurers since Medicaid margins are generally lower than the commercial/group business.

What do we expect for the second half of 2020?

Declining payroll employment, continued change in membership mix, continued use of telemedicine, and resurgence of COVID-19 cases will be our focus for health insurers for the rest of 2020.

As payroll employment declines, we will see a decrease in premiums from the fully insured group/employer business. Some of this will be mitigated because eligible individuals who may have lost their job and their job-based insurance shift to the individual or Medicaid market. Though these markets may blunt the impact, they won't eliminate the increase in the uninsured rate and slowdown in expected revenue growth for the full year.

As more deferred elective procedures return, claims trends will rise in the second half of the year. But given the performance in the first part of 2020, most U.S. health insurers' full-year earnings will be in line or better than we expected entering 2020.

However, uncertainties remain around the future spread of the disease. The uptick of cases and regional differences in responding to COVID-19 indicate the impact on health insurers may well be more local in the second half of the year. But if the first half is any indication, we expect deferral of nonemergency services to somewhat offset another uptick in COVID-19 claims.

Another important aspect that we will track during the second half of 2020 is insurers' premium rate filings for the following year. Several questions remain around the direct and indirect impact of COVID-19, including:

  • Will a significant amount of deferred elective care return in 2021?
  • Will there be greater need for mental health services as the long-term impact of an economic recession and stay-at-home policies hurt individuals?
  • What will be the cost of the COVID-19 vaccine, and will insurers cover it without cost-sharing requirements?

We will track the premium rate filings for insurers to understand their expectations for claims trend next year.

Our Outlooks On The Life, Health, And P/C Insurance Sectors Remain Stable

Our sector outlooks on all three major insurance sectors remain stable. Although each earnings season can present its own set of surprises, we don't expect second-quarter results to lead us to revise our outlooks.

Appendix 1

Impact of 100,000 Deaths On U.S. Life Insurers
Insurer Impact of earnings/claims Population mortality

CNO Financial Group Inc.

$20 mil.-$30 mil. 80,000 - 120,000 deaths in the U.S.

Global Life Insurance Co.

$25 mil. 80,000 deaths in the U.S.

Lincoln National Corp.

$90 mil. 100,000 deaths in U.S.

Primerica Life Insurance Co.

$15 mil. 100,000 deaths in the U.S.

Principal Financial Group Inc.

$20 mil. 100,000 deaths in U.S.

Prudential Financial Inc.

$200 mil. 100,000 deaths in the U.S. population and 40,000 deaths in Japan

Reinsurance Group of America Inc.

$400 mil.-$500 mil. 100,000 U.S. deaths and applying a similar set of impacts globally

Voya Financial Inc.

$10 mil.-$30 mil. 100,000 deaths in the U.S.
As of March 2020. Source: Company earnings calls and public filings; S&P Global Ratings research.

Appendix 2

U.S. GAAP Interest Rate Assumption Vary Across Life Insurers
Insurer Current rate assumption Grading period

Ameriprise Financial Inc.

5.0% 10-year U.S. Treasury 3.5 years

American Equity Insurance Co.

3.8% long-term U.S. Treasury 20 years

Athene Life Insurance Co.

2.75% 10-year U.S. Treasury 8 years

Brighthouse Financial

3.75% 10-year U.S. Treasury 10 years

Equitable Financial Life Insurance Co.

2.25% long-term rate assumption 10 years

Lincoln Finance Ltd.

3.5% 10-year U.S. Treasury 7 years

MetLife Inc.

3.75% 10-year U.S. Treasury 8 years

Principal Financial Group Inc.

4% 10-year U.S. Treasury 10 years

Prudential Financial Inc.

3.75% 10-year U.S. Treasury 10 years

Voya Financial Inc.

3.75% 10-year U.S. Treasury At least 10 years
As of March 2020. GAAP--Generally accepted accounting principles. Source: Company earnings calls and public filings; S&P Global Ratings research.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Deep Banerjee, Centennial (1) 212-438-5646;
Stephen Guijarro, New York + 1 (212) 438 0641;
Secondary Contacts:Neil R Stein, New York (1) 212-438-5906;
Patricia A Kwan, New York (1) 212-438-6256;
John Iten, Princeton (1) 212-438-1757;
Carmi Margalit, CFA, New York (1) 212-438-2281;
Heena C Abhyankar, New York + 1 (212) 438 1106;
Brian Suozzo, New York + 1 (212) 438 0525;
Ieva Rumsiene, Centennial + 303-721-4734;
Anika Getubig, CFA, New York + 1 (212) 438 3233;
Harshit Maheshwari, CFA, Toronto (1) 416-507-3279;
Francesca Mannarino, New York (1) 212-438-5045;

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