Allianz confident over BI exposure as long as regulators don’t change the game

Allianz group CFO Giulio Terzariol told analysts during the insurer’s Q1 conference call that the €400m-plus provision the firm has set aside during the quarter for entertainment and Covid-19-related business interruption (BI) losses should cover most of the expected claims as long as politicians or regulators do not change the rules of the game. Mr Terzariol told analysts that the overall loss from Covid-19 for the quarter would be €800m to €1bn, chiefly made up of claims from event cancellation and BI coverage, seemingly at Allianz Global Corporate & Specialty (AGCS), and credit insurance business written by Euler Hermes. The figures given during the call were rather vague but Mr Terzariol said the group’s P&C operations – chiefly AGCS – have incurred about €400m of event cancellation and BI claims, suggesting that the split would be about equal. Allianz Partners, the international health, travel and roadside assistance operation, accounts for about another €100m of the total, Mr Terzariol told analysts. On that basis, Euler Hermes would account for the majority of the €300m to €500m balance. Analysts would have been satisfied to hear that Allianz believes it has booked the majority of its total Covid-19 claims, in BI at least, during the first quarter. This includes the compromise agreement reached with Bavarian state authorities to pay an element of BI claims brought by hotels and restaurants without recognising legal liability, and a similar effort in Switzerland, he said. But analysts will have also noted the important caveat Mr Terzariol gave about BI claims being potentially hit by regulators and “other stakeholders” changing the rules of the game. Clearly, he was referring to efforts by some politicians and lawyers to retroactively open up BI coverage to virus claims. Asked by one analyst whether the claims booked in the quarter would account for the bulk of expected virus-related BI and event cancellation losses, Mr Terzariol explained: “On business interruption, absolutely the agreement that we did in Germany here in Bavaria is definitely included in the numbers. We are not booking based on reported claims. We are booking mostly based on incurred but not reported. This applies also to entertainment, for example, where we have a €200m-plus loss. This is not because we had €200m-plus of claims reported by the end of March. But that's clearly the expectation of what has been incurred but not reported yet.” He added that while on a technical basis most of the expected losses should be booked, external regulatory and political factors can alter the picture. “On the business interruption, I think that we have booked most of the losses. Clearly, we're going to see some other losses coming through other cancelled legislation. But also, let me tell you that every time we make a statement, things might change here. That's the reason why we don't give you guidance. Clearly, we have been diligently working on understanding all the ins and outs of the Covid-19 crisis and running scenarios. The point is, the environment might change. So, something that we tell you today, in two, three weeks might be very different because regulators and other stakeholders, maybe are changing the rules of the game,” he said, according to results reporting service Seeking Alpha. “But based on the best knowledge that we have, we will say that on the business interruption, we should have booked most of the losses. Not all, but I'd say we booked a significant amount,” he added. One positive note for Allianz was that the quarter saw a recovery at AGCS, which reported strong pricing momentum and a significantly improved underwriting result, excluding Covid-19 impacts, said Mr Terzariol. Stripping out those impacts, AGCS would have reported a combined ratio of 100%, compared with a nasty 112.3.% for full-year 2019 that was driven by a series of large losses plus €591m of runoff liabilities for deteriorating long-tail claims. When asked to break down the potential €1bn first-quarter impact from the pandemic, the CFO explained that AGCS will take a big portion of the entertainment and BI losses. “Where is this [€1bn hit] coming from? Definitely a big chunk of it is going to come from AGCS. And in the case of AGCS, we have both in Q1, a little bit more than €200m of losses due to entertainment. We expect these losses by the end of the year to double, specifically entertainment. And then clearly, we also expect to have additional impact in AGCS, which could be also the D&O financial lines. So overall, we expect losses for AGCS to be higher compared to just to the €200m,” said Mr Terzariol. The overall P&C segment showed a growth rate of about two percentage points, which Mr Terzariol said was driven mainly by price development rather than volume. “You can see a nice dynamic in the UK from a price development and growth point of view. In Spain as well, although you see a negative number from a growth point of view, the price change was very positive. And then also AGCS had a double-digit price increase, offset by lower volume, but that's definitely the picture we like to see in the case of AGCS,” he said.

Allianz confident over BI exposure as long as regulators don’t change the game

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