US insurers' first quarter earnings to be impacted in COVID-19's shadow: S&P

The impact of COVID-19 on capital markets is expected to influence US insurers' earnings in the first quarter of 2020, but the underwriting performance is likely to remain unaffected, according to a new report by S&P.

S&P Global Ratings expects the life, health, and property/casualty (P&C) insurers' earnings in the quarter to be impacted. However, analysts believe that COVID-19's effect on morbidity and mortality rates likely won't have as much of an impact on underwriting performance.

"P/C insurers' underwriting performance for the first quarter will be the least affected of the three sectors from this pandemic," said S&P Global Ratings credit analyst Stephen Guijarro. "However, for the remainder of 2020, as continued shelter-in-place restrictions further stress economic disruption, we will keep a close eye on state legislative initiatives attempting to override standard exclusions in business-interruption polices."

"While pandemic risk has long been an excluded cover for business-interruption policies, a few states have sought to pass legislation to force insurers to pay for these coverages to specifically assist small businesses," it added.

The agency believes that US health insurers are likely to report "better-than-expected" underwriting results.

According to S&P credit analyst Deep Banerjee, "a deferral of nonemergency medical services will more than offset COVID-19-related medical claims in the first quarter. However, risks remain for the remainder of 2020 as increasing unemployment levels will hurt premium growth for health insurers, and a failure in containment efforts or a second wave of the pandemic can meaningfully disrupt operating performance for the health insurers."

"As for US life insurers, they will face a true test to their hedging framework, especially as it applies to their market-sensitive liabilities," Banerjee said. "Additionally, on the asset side, US life insurers hold over $4 trillion of invested assets on their balance sheet. Impairments on these investments have been low over the last 10 years, but they may increase starting in the first quarter of 2020. We expect the amount of impairment will be a negative force, but not a major shock to first-quarter earnings."