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Insurers cope with pandemic losses amid hardening market

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Losses related to the COVID-19 pandemic began to hit insurers’ books in the second quarter but will remain “manageable” for the industry, according to analysts.

The sector has even seen some financial benefits from the pandemic as the slowdown in social and economic activities has led to reduced claims frequency on lower miles driven for commercial and personal auto insurers. In addition, increasing commercial insurance prices have helped offset a decline in premiums.

“Second quarter is where you finally saw some of the COVID-19 impact hitting the books,” said Stephen Guijarro, a director with S&P Global Ratings Inc. in New York.

Pandemic effects began to hit insurers in the second half of March, said James B. Auden, managing director, North American head of nonlife insurance ratings for Fitch Ratings Inc. in Chicago.

“What you saw in the quarter was material pandemic losses for virtually every commercial insurance company,” said J. Paul Newsome Jr., Chicago-based managing director at investment brokerage Piper Sandler Cos.

The effect of the pandemic varied for different insurers depending on their risk profiles, business mix and geographic spread, Mr. Guijarro said.

Looking at the second-quarter losses booked for insurers rated by S&P, the estimated losses were initially booked for about $5 billion, which was lower than expected, he said.

S&P’s initial estimate for COVID-19 losses in the United States was $15 billion to $30 billion, Mr. Guijarro said.

Fitch looks at a group of some 50 publicly traded insurers to provide an indicative proxy for the industry, Mr. Auden said. For those insurers, the incurred losses from the pandemic totaled approximately $7 billion, which equates to roughly 3.5 points on insurers’ loss ratios. “So, upward movement, but things most companies can manage,” Mr. Auden said.

Adding in the larger “North American universe” along with Lloyd’s of London and some larger European insurers, such as Allianz SE, Axa XL, a unit of Axa SA, and Swiss Re Ltd., those losses climb to $17 billion, Mr. Auden said.

Wells Fargo’s estimate for industrywide pandemic-related losses is $65 billion, which is the midpoint of a range of estimates as high as $100 billion, said Elyse Greenspan, director of equity research for property/casualty insurance at Wells Fargo Securities LLC in New York.

Even that figure, the largest in the group, is “manageable” for the industry, Ms. Greenspan said. “Based on our analysis, we continue to believe this is an earnings event for the industry and is not going to absorb excess capital.”

“Largely, the amount of losses relates more to core earnings or perhaps in some cases to a loss for 2020, but not a major shift in capital,” Mr. Auden said.

“Losses appear to be quite manageable from a capital perspective, and it’s really a question of profitability as opposed to solvency,” said Mr. Newsome of Piper Sandler.

Many of the losses booked so far relate to event cancelation and travel insurance, which are “uncontroversial,” he said. 

There may be uncertainty surrounding business interruption claims, however, because claims denials are being challenged by policyholders in the courts, he said.

“It looks like most companies are taking a view that there will be relatively few business interruption claims in the U.S. and that, for the most part, the courts will uphold policy language that excludes business interruption claims for pandemic-related causes,” Mr. Newsome said.

Mr. Guijarro noted that insurers have won several early court decisions on business interruption claims.

The open question, analysts said, is the amount of further losses.

“There is clearly concern by virtually everybody in the business” about more claims related to the pandemic, Mr. Newsome said.

Losses could materialize for the remainder of the year and into 2021, Ms. Greenspan of Wells Fargo said.

“There’s uncertainty as to what will unfold in the third and fourth quarters,” Mr. Auden said. “We don’t think that companies have captured all their exposures. I would think the estimates will go up as events unfold.”

Defense costs could be a factor for insurers for years as litigation is resolved, he said.

“It’s like being in a hurricane that never ends,” Mr. Newsome said.

In the face of the losses and uncertainty, however, the second quarter did produce some upside surprise for insurers.

“There were some benefits, particularly in auto insurance,” Mr. Newsome said. “The size and the persistence of the lower miles driven was much bigger than I expected.”

Auto insurers benefited from extremely favorable loss trends, Ms. Greenspan said.

In general, underlying claims frequency across the industry was lower than expected, Mr. Newsome said, as were underlying second-quarter results excluding the pandemic.

Commercial insurers are also seeing further prices increases as markets continued to harden in the second quarter.

“In commercial insurance, prices are going up. We’re in a hard market,” Mr. Newsome said. “The insurers are reacting to the stresses of the pandemic and the stresses of the financial markets, and they’re raising prices, in some cases substantially.”