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Down But Not Out: Insurers' Capital Buffers Are Proving Resilient In The Face Of COVID-19


Instant Insights: Key Takeaways From Our Research


Corporate And Government Ratings That Exceed The Sovereign Rating


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An Operational Guide To S&P Global Ratings' Risk-Based Capital Adequacy Model For Insurers

Down But Not Out: Insurers' Capital Buffers Are Proving Resilient In The Face Of COVID-19

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.

Chart 1


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).

Table 1


Region/segment (%)
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
Europe 18.9
World, Far East 21
Emerging Far East 24.5
Nordic, GCC 31.5
BRIC, Latin America 38.5
Hedge funds 23.6
Private equity # in addition to above stress 7

Table 2

Region/segment (%)
Germany, Switzerland, Netherlands, Australia, New Zealand 5.6
Japan, Other Europe 7.0
U.K., Ireland, Spain, U.S., Other world 12.6
Owner-occupied property* 16.1

Table 3

Credit Migration And Default
(%) AAA AA A BBB BB B CCC/C Unrated D
AAA 92 8 0 0 0 0 0 0 0
AA 0 88 12 0 0 0 0 0 0
A 0 2 88 8 0 0 0 0 0
BBB 0 0 3 89 5 1 1 0 0
BB 0 0 0 3 79 11 3 0 3
B 0 0 0 0 4 75 10 0 12
CCC/C 0 0 0 0 0 10 45 0 45
Unrated 0 0 0 0 0 0 0 97 3
D 0 0 0 0 0 0 0 0 100

Table 4

Loans, Mortgages, And Bank Deposits
Mortgages—performing (%)
LTV <60% 0.4
LTV 60%-85% 3.5
LTV >85% 7
Loans 15.4
Bank deposits (%)
A- or higher 0
BBB 0.1
BB 0.5
B 1.6
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).

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).

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.

Looking Ahead

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.

Related Research

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;

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