COVID-19 fallout will drag down Allianz's AGCS results in 2020, warns S&P

Allianz Global Corporate & Specialty SE (AGCS) outlook has been revised to negative from stable by S&P Global Ratings, citing "weak underwriting performance" and the negative impact from COVID-19.

S&P Global believes that the group's plans to significantly improve its underwriting results over the next two years could be hampered by uncertainties regarding future reserving needs or long-term COVID-19-related consequences.

AGCS, the corporate insurer of the Allianz Group, will "continue to see weak underwriting performance in 2020," it said. "Furthermore, COVID-19 fallout will likely drag down AGCS' results in 2020, since the company faces claims related to events as well as film and TV production cancellations or postponements. We believe the negative impact from COVID-19 on the underwriting result for the full 2020 might exceed €500 million, after a €233 million loss in the first quarter," the agency added.

AGCS started a comprehensive programme to improve its underwriting results from a combined (loss and expenses) ratio of 112 percent at year end-2019 and 117 percent at the end of first-quarter 2020. However, S&P view these levels as "weaker than peers', such as Chubb, Zurich Group, or HDI Global".

S&P noted that it was previously assumed that weak underwriting results at the US-based subsidiary Allianz Global Risks U.S. Insurance Co. (AGRUS) was the root cause of AGCS' underperformance. However, after the reserve strengthening of about €600 million in 2019 for the entire AGCS book, it now believes that other regions and businesses outside the US, such as the liability business in Germany, are contributing to the group's underperformance. S&P believes these weaknesses could create further needs for reserve strengthening in 2020.

AGCS' improvement strategy includes price increases and partly cancelling unprofitable business. The company expects to improve its combined ratios by 2022.

According to the agency, AGCS will achieve profitability improvements, supported by the success of the recent price increases in the industrial-line business, for example. However, there's a possibility that the overall results might be compromised by the uncertainties of future reserve strengthening, or by the magnitude of the repercussions from the coronavirus pandemic.

S&P stated that the negative outlook reflects the possibility of a one-notch downgrade over the next 12-24 months if AGCS cannot materially strengthen its operating performance and underwriting results. The outlook can be revised to stable if AGCS can consistently achieve profitable underwriting results with a combined ratio of 95-98 percent.