North American insurers face key vulnerabilities and potentially unforeseen downside risks amid the fallout from the coronavirus pandemic, including outsized investment exposure with market volatility exacerbating potential issuer defaults, increased mortality risk and elevated claims, Fitch Ratings says
Fitch revised the life and health insurance sector rating outlooks to negative from stable amid the coronavirus fallout in March, with approximately 93% of Fitch’s public and privately rated North American insurers having been reviewed since March 1. Across all insurance sectors, the rating actions as of May 26 are as follows; 75% of issuers affirmed with Stable Outlooks, 19% affirmed with Negative Outlooks, 3% downgraded one notch, and 3% maintained on Rating Watch. In addition, Fitch rates about 50 insurance-linked securities (ILS), many of which are credit-linked notes where the risk taker is a reinsurer or financial institution. To date, we have completed reviews on 96% of the ILS portfolio with 60% of transactions affirmed with Stable Outlooks, 29% affirmed with Negative Outlooks, 7% downgraded, and 4% on Rating Watch Negative.
The U.S. life sector is most exposed to capital market volatility, with the industry’s stable rating outlook going into 2020 vulnerable to slowing economic growth, macroeconomic uncertainty tied to global trade and monetary policy, and late cycle credit market conditions. The review of our ratings on U.S. life insurers in light of the coronavirus pandemic has focused on companies’ exposure to three primary risks — asset risk, mortality risk and market sensitive businesses such as variable annuities, with death and living benefit guarantees.
The Negative Outlook revisions in March reflect not only our base or rating case expectations regarding the economic fallout from the coronavirus, but also the great uncertainty regarding our assumptions given the unprecedented nature of shutdown of our economy in response to the pandemic. However, the life insurance industry has very strong balance sheet fundamentals including strong capital and good asset quality, strong earnings and favorable liquidity profile. Prior to coronavirus review, almost all Fitch-rated U.S. life insurers had a Stable Outlook.
Health insurance has many moving parts and a lot of uncertainty, given the lack of clarity around the true infection rate due to the low level of effective testing, the potential for a secondary wave of infections, the amount of deferred care and the timeline for its return to the healthcare system, potential increase in the severity of the illness due to deferred diagnostic procedures, and loss and shift of enrollment due to the economic fallout.
Health insurers, while facing higher-than-anticipated acute care claims, have lower interest rate and investment risk and may temporarily benefit from the pandemic as health care providers and insurers have seen a substantial reduction in high-cost elective procedures, diagnostic procedures, emergency visits and routine care over the past two months. As the lockdown in the U.S. expanded, claims related to strokes and heart attacks also declined significantly, which may suggest that people who should have sought medical treatment did not and that additional complications may result in subsequent months.
Property and Casualty (P&C) insurers, while facing lower risk from the pandemic, will see earnings pressure from claims losses in several segments and lower investment income. Reinsurers generally mirror the risk trends of non-life companies with several large global insurers likely to absorb significant claims losses from these events.
As with banks, ratings actions have been less severe relative to those during the global financial crisis thus far, when investment-grade securities fell into non-investment-grade territory or suffered deep defaults. Insurance companies are managing better due to improved liquidity and higher capitalization, with more conservatively positioned investments and covered debt covered maturities.