- We estimate that, while financial market stresses related to COVID-19 could have wiped out up to 85% of the global insurance industry's capital buffer at the beginning of 2020, a cushion remains to support most ratings.
- Asset stresses represented 4%-7% of starting total adjusted capital on average, with equity stress the single most significant; however, a combination of credit default and migration was at least as severe as equity in most regions.
- That estimate does not account for the rebound in the financial markets in recent months, so we believe there should be some buffer to absorb a possible second market dip. Insurance losses are expected to be contained within the industry's earnings.
- Capital sensitivity is an important factor in our ratings, especially during rapidly evolving events such as the pandemic, but we remain focused on the long-term implications for our ratings on insurers.
S&P Global Ratings' surveillance of insurance companies has both increased and deepened since the COVID-19 pandemic began to spread around the globe. The impact has been broad, covering blanket travel restrictions, societal lockdowns, and extensive monetary and expansive fiscal policy responses. Throughout the pandemic, we've focused on key risks to insurers, to ensure ratings and outlooks appropriately reflect our expectations. To date, we've taken 51 actions globally, representing just under 10% of our insurance portfolio (see chart 1). This compares favorably to the broader corporate and government rating universe where 41% of ratings have experienced a downgrade, negative outlook revision, or CreditWatch negative placement.
In our reviews, we incorporate the up-to-date views of credit conditions and other sectors--including corporates, banks, and sovereigns--to capture how these expectations might affect our ratings on insurers. Updated economic conditions are embedded in our updated earnings and capital forecasts, which can lead to rating actions.
Most companies have updated financial results, including for the half-year, giving the market tools to analyze how the insurance industry has coped with COVID-19's implications. Insurers' published results and developments in the financial market will provide us further insight into what to expect for the remainder of 2020 and into 2021, as the global economy starts to recover. In particular, we anticipate, and in fact are already seeing, more light on performance of particular insurance lines and the impact on claims. For instance, HSBC estimates that reported COVID-19 claims have increased 3x during second-quarter, to $20 billion from $6 billion in the first quarter. By geography, most of these losses were reported by European insurers (about 60%). Globally, the majority (89%) came from the property/casualty sector. Reinsurers accounted for just over one-third of reported losses. We continue to expect insured losses from COVID-19 to be an earnings event, rather than a capital event for the industry in 2020. In addition, financial markets have recovered significantly from their depths in March and April, with the capital adequacy implications of credit rating migrations and impairments offset by some of the rebound in equity markets and credit spreads.
So far, we believe the industry's buffers have shown resilience in the face of the pandemic. In addition, we believe that management teams have various other mitigating actions available to them to withstand further pressure. And although there might be some exceptions, we expect this industry resilience to continue through the remainder of 2020, barring any other unforeseen shocks.
Our Forward-Looking Approach To Stress And Scenario Testing
Our rating actions to date incorporate both the updated earnings and capital forecasts and our assessment of resilience testing, with a key focus on financial market disruptions. Our forecasts and expectations for capital and earnings have also benefited from heightened surveillance (both ours and management's), which we incorporate into our base-case scenarios, and how particular financial market stresses affect capital adequacy. Application of scenario and stress test overlays further conditions our views in real-time to respond to, and identify, potential outliers given the dynamic nature of macroeconomic and financial markets.
We expect financial market risk to be the most significant and immediate risk to our ratings on insurers, primarily because of the pressure it places on capital adequacy. Therefore, our focus has been on assessing the sensitivity of insurers' capital adequacy positions to movements in asset values and potential deterioration in credit quality. We assess this sensitivity to a range of assumptions, including:
- Equity stress--the equity price fall derived from our insurance capital model assumptions (see table 1). The magnitude of stresses have been chosen on average below what we observed at the worst of the fall in 2020 to reflect realistic sustainable stress (we calibrate it at 70% of the 'BBB' confidence level defined in our capital model criteria);
- Real estate--the real estate price fall derived from our insurance capital model assumptions (calibrated at 70% of the 'BBB' confidence level). The 6%-13% range is milder than the 16%-18% price fall in the U.K. and U.S. in 2008, for example;
- Default and transitions--global defaults and transitions observed during the 2001 credit crisis (see tables 2). The default assumptions can be compared with our forecast regarding speculative-grade corporate defaults to increase to 8.5% in Europe, the Middle East, and Africa (EMEA), and 12.5% in the U.S.; and
- Loan and mortgages--default on loans derived from our insurance capital model assumptions (calibrated at 70% of the 'BBB' confidence level; see tables 3 and 4).
|U.S., U.K., Australia, Switzerland||18.9|
|Italy, Portugal, Netherlands, Japan, Denmark, Israel, New Zealand||21|
|South Africa, Spain, Canada, Hungary, Mexico, Brazil, Chile, Norway, Belgium, France, Sweden, Germany||24.5|
|Austria, Philippines, Singapore, Czech Republic, Finland, Korea, Taiwan, Greece, Turkey, Hong Kong, Malaysia, Indonesia, Ireland, Argentina, Peru, Colombia||31.5|
|India, Poland, Thailand, Russia, China||38.5|
|World, Far East||21|
|Emerging Far East||24.5|
|BRIC, Latin America||38.5|
|Private equity # in addition to above stress||7|
|Germany, Switzerland, Netherlands, Australia, New Zealand||5.6|
|Japan, Other Europe||7.0|
|U.K., Ireland, Spain, U.S., Other world||12.6|
|Credit Migration And Default|
|Loans, Mortgages, And Bank Deposits|
|A- or higher||0|
|CCC+ or lower||7.3|
|LTV--Loan to value.|
Capital Buffers Hold Their Own, Given The Circumstances
In total, the industry's capital buffer appears resilient to our assumed stresses. However, we estimate that 85% of the global insurance industry's capital buffer entering 2020 would be wiped out under the scenarios we ran. Equity risk was the largest single factor in buffer consumption (see chart 2).
On average, these stresses represented 4%-7% of insurers' total adjusted capital at the beginning of 2020, with North America appearing to be the most resilient region. Equity risk was the largest single risk factor in all regions except Latin America. However, on average, the combination of default and migration risk was more significant than equity market risk globally, and equal to or greater than equity risk in all regions but Asia-Pacific. EMEA was most exposed to property risk (see chart 3).
We've also considered the implications of movements in interest rates and credit spreads following the reactions from policymakers and markets to the pandemic. However, due to regional accounting differences in the way that movements in spreads and rates affect insurers' balance sheets, it was more challenging to accurately capture the impact on our model. So while we assumed a stress on the asset and liability management risk module within our model, it is just one lens we used to assess this, along with review of disclosures, including regulatory, and discussions with management to understand exposure to rates and spreads.
The sensitivity of an issuer's capital adequacy to shocks is an important factor in our rating analysis, but of course it doesn't tell the whole story by itself. Our analysts have also considered other factors that might mitigate the impact of our assumed stresses and scenarios, including:
- Actual performance of year-to-date financial metrics and regulatory capital adequacy;
- Reviewing insurers' actual updated asset allocations and holdings to forecast how those assets perform;
- Effectiveness of hedging programs;
- Other mitigating actions, such as reinsurance purchasing, capital raising, and cuts to dividends; and
- Insurers' ability to generate earnings and capital during the remainder of 2020 and through our forecast period.
In most cases, where capital positions have been somewhat sensitive to asset value shocks, we have incorporated our discussions with issuers on their updated positions, mitigation tools, or forecast earnings into our analysis. The total impact of these measures can be seen in our relatively limited number of rating and outlook actions on insurers this year. The prospective view on capital adequacy is the relevant one for ratings on insurers. With that, we form a view over the next two-to-three years of earnings, business direction, risk appetite and financial discipline. In most cases, we expect the benefits from 2021 and 2022 earnings, along with management actions, to counterbalance the 2020 earnings impact.
We expect our ratings on insurance issuers to be resilient to the pandemic's economic and financial shocks. Capital strength, risk management, and conservative asset allocations entering the pandemic have gone a long way to ensure stability of capital and ratings to date.
As recent reporting continues to flow in and sheds more light on the long-term implications of COVID-19, we will continue to assess the impact on our ratings on insurers. As indicated in our most recent global report (see "Resilient For Now: A Second Wave Could Eat Into Insurers' Capital" published July 13, 2020, on RatingsDirect), the shape of the economic and financial market recoveries will be instrumental in insurers' ability to bounce back. With the financial markets having recovered much of the ground lost, we believe the industry has regained some, but not all, of the capital cushion it had amassed pre-pandemic. This recent improvement in capital will help mitigate some risks on the horizon such as rating migration and lower-for-longer interest rates. While we do not rule out a second, and perhaps more severe or prolonged, financial market shock, particularly if a second wave of COVID-19 infections leads to more widespread lockdown measures in major economies, our focus now moves toward the economic recovery and how that might affect insurers' profiles. In particular, assessing the sensitivity of insurers' growth rates, claims and expenses, and investment returns to slower economic growth, higher unemployment, prolonged low interest rates and heightened perception of risk in consumers and corporate insurance buyers.
We expect the ratings on issuers in the industry to continue being resilient through the recovery. However, some insurers, particularly those with thin capital buffers or concentrations in asset classes or lines of business most acutely affected by the pandemic, have experienced and might still experience downgrades or negative outlook revisions.
- A Look At U.S. Life Insurers' $4.5 Trillion Investment Portfolios Amid COVID-19, Sept. 16, 2020
- Default, Transition, and Recovery: The Gap Between Market Expectations And Credit-Based Indications Of U.S. Defaults Is Growing, Aug. 27, 2020
- Default, Transition, and Recovery: Credit And Economic Deterioration Signals A Rising European Speculative-Grade Default Rate Despite Market Optimism, Aug. 18, 2020
- SLIDES: Resilient For Now: A Second Wave Could Eat Into Insurers' Capital, July 30, 2020
- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
This report does not constitute a rating action.
|Primary Credit Analyst:||Dennis P Sugrue, London (44) 20-7176-7056;|
|Secondary Contacts:||Charles-Marie Delpuech, London (44) 20-7176-7967;|
|Simon Ashworth, London (44) 20-7176-7243;|
|Volker Kudszus, Frankfurt (49) 69-33-999-192;|
|Eunice Tan, Hong Kong (852) 2533-3553;|
|Alfredo E Calvo, Mexico City (52) 55-5081-4436;|
|Carmi Margalit, CFA, New York (1) 212-438-2281;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.