Life Insurance Sector

Asset Stress From COVID-19 Drives Negative Ratings For Insurers

Such outlooks generally have a one to two year window

Chicago-26 June 2020 — Following a review of North American insurers on the coronavirus impact, asset stress contributed to the most Negative Rating Outlook changes, according to Fitch Ratings.

Fitch reviewed its entire portfolio of rated North American insurers between March 17 and June 5, 2020, in light of the risks and uncertainties related to the global coronavirus pandemic. Fitch established a set of key rating assumptions that reflect its assessment of the potential impact of the pandemic, including its economic impact.

Fitch took rating actions on all 99 public and privately rated insurance groups in its North American coverage universe, the bulk of which were affirmations with a Stable Outlook at 75%, followed by affirmations with a Negative Outlook at 19%, downgrades at 3% and Rating Watches maintained at 3%.

Negative Outlooks generally have a one- to two-year horizon, and reflect Fitch’s expectation that many of the adverse impacts of the pandemic will take some time to manifest. However, Fitch will take rating actions sooner if the negative rating sensitivities are clearly breached for a sustained period, or if the fallout from the crisis has a bigger effect on an insurer than currently expected.

U.S. Life Carriers Fared The Worst

Of the major insurance sectors, the North American life insurance sector with its high asset leverage fared the worst in Fitch’s pro forma rating case stress analysis. Health insurers performed better in the stress than originally expected due to the suspension of many medical procedures and a reduction of in-office visits. Property/casualty (P/C) performed the best due to low asset leverage and lower non-coronavirus claims from reduced economic activity and stay-at-home orders.

“The primary credit concern for U.S. life insurers is asset losses tied to credit bond/loan impairments and equity investment value declines from a sustained disruption in the broader economy and financial markets,” said Julie Burke, Managing Director and head of North American Insurance at Fitch Ratings.

“Asset losses are likely to be more far-reaching than previous recessions and we’ve adjusted our assumptions accordingly.”

Compared with the financial crisis, exposure to corporate credit within life insurers’ current investment portfolios reflects higher allocation to bonds rated ‘BBB’, which are vulnerable to rating migration, but lower allocation to below-investment-grade-corporates. While certain industry sectors are particularly stressed during this credit downturn, including travel, leisure, entertainment and energy, the life insurance industry’s exposure to these troubled sectors is limited.

Fitch’s view was and remains that the coronavirus health crisis has brought on unprecedented economic contraction, the speed and depth of which we have never seen in our lifetime. It is hard to relate this to previous cyclical downturns, making it very difficult to predict how it will play out. There remains significant uncertainty as the pandemic is in the early stages. Fitch will adjust assumptions and views as new information becomes available.

The primary credit concern for U.S. life insurers is asset losses tied to credit bond/loan impairments and equity investment value declines from a sustained disruption in the broader economy and financial markets...

Excerpts from the report: Coronavirus Rating Impact

Life Sector Most Adversely Affected

In March 2020, Fitch revised the rating outlook for the North American life insurance sector to negative from stable due to increased concerns and uncertainty over the coronavirus pandemic and related impacts on the credit quality of life insurers. At that time, Fitch expected a material number of life insurers with Stable Outlooks would be revised to Negative Outlooks, and that the limited number of life insurers with Negative Outlooks going into the coronavirus pandemic would be most exposed to near-term downgrades. Fitch reviewed 48 North American life insurance groups that it rates on a public and private basis, which represents approximately 77% of industry assets.

The rating outcomes were as follows:

  • 69% were affirmed with a Stable Outlook
  • 23% were affirmed with a Negative Outlook
  • 4% were downgraded with a Negative Outlook
  • 2% were downgraded and maintained on Rating WatchEvolving
  • 2% were maintained on Rating Watch Evolving

The limited number of downgrades reflects, in part, the industry’s strong balance sheet metrics going into 2020, which included very strong statutory capitalization, good asset quality and very strong liquidity position.

Health Insurance Sector Modestly Affected

As with North American life insurance, Fitch revised the rating outlook for the U.S. health insurance sector to negative from stable in March 2020. The primary driver was the potential for increased coronavirus -related utilization of the healthcare system. At that time, Fitch had several health insurers on Positive Outlook and quickly revised the Outlooks to Stable to reflect the sudden deterioration in the environment that is inconsistent with positive rating actions. With the pro forma analysis upcoming, Fitch expected a modest number of health insurers with Stable Outlooks would have their Outlooks revised to Negative.

Fitch reviewed 12 U.S. health insurance companies that it rates on a public and private basis, which represent approximately 80% of the U.S. population whose medical benefits are managed by private health insurers.

The rating outcomes were as follows:

  • 83% of ratings were affirmed with a Stable Outlook;
  • 17% of ratings were affirmed with a Negative Outlook;
  • No ratings were downgraded.

The report “Coronavirus Rating Impact: North American Insurers” is available at www.fitchratings.com.

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