Covid-19 provisions continue to hammer insurer earnings but balance sheets secure for now

The latest set of leading European and global (re)insurance company results have starkly shown the huge impact Covid-19 is having on the sector’s earnings, as seven companies collectively reported underwriting provisions for virus claims of some $1.64bn. The same group of companies – including Munich Re and HDI parent company Talanx – reported a massive fall in net profits from a group total of $407bn for Q1 2020, compared with just under $2.3bn in the same period last year. The first-quarter results in Commercial Risk Europe’s analysis include Alleghany, Everest Re, Munich Re, Talanx, Renaissance Re and the Covid-19 provisions made by RSA in its trading update. The euro figures given by Talanx and Munich Re were converted to US dollars at today’s exchange rate. The numbers show that for now, at least, the pandemic remains an earnings rather than balance-sheet event. Many companies have withdrawn their profit forecast for the year and cancelled dividend payments because of the uncertain economic and financial outlook for the rest of 2020 at least. But some are still happy to pay dividends and all state that, while the virus is challenging, they are more than adequately resourced to weather the storm. For now, the leading credit ratings agencies agree. Also of particular interest to risk managers will be the continued statements from insurance and reinsurance companies that the pandemic is adding further resolve to continue the market hardening started in earnest last year and at the year-end 2019 renewals. One notable element of this week’s earnings results is the big insurers increasingly telling analysts that their virus exposures are limited through exclusions to virus claims in business interruption (BI) policies, and they have plenty of reinsurance cover anyway. Insurance and reinsurance lawyers will be sharpening their pencils in London, Zurich, Bermuda and New York as they prepare for a swathe of complex coverage disputes between insurers and reinsurers over hours clauses, follow the fortunes and the like. Talanx, parent company of HDI Global and Hannover Re, reported decent group net income of €223m for the first quarter of this year, compared with €235m for the same period last year. Coronavirus-related large losses were €313m. Reinsurance activities accounted for the largest part of the virus provisions at approximately €220m. “The pandemic and the lockdown most of all led to large numbers of business closures and cancelled events that are insured with our risk carriers,” commented the group, suggesting it expects to pay some BI claims. Torsten Leue, chairman of Talanx AG’s board of management, said: “The coronavirus pandemic has stretched people and enterprises in many countries of the world to their limits. We haven’t seen a crisis like this since the Second World War.” Munich Re accounted for just under half of the virus provisions reported by this group of companies as it revealed Covid-19 losses of about €800m, driven by event cancellation insurance. The reinsurance group reported net profit of €221m for the first quarter of this year against a profit of €663m at the same point last year. This was boosted by a release of loss reserves of about €224m for basic claims from prior years, which corresponds to 4% of group net earned premiums. The company explained: “Munich Re still aims to set the amount of provisions for newly emerging claims at the very top end of the suitable estimation range, so that profits from the release of a portion of these reserves are possible at a later stage.” This certainly bucks the trend of recent reserve additions caused by the prolonged soft market before the hardening began last year, and it will be interesting to see whether others follow suit and bolster their earnings with reserve releases in future quarters. Also of note were the results and commentary reported by Arch Capital in Bermuda. It reported a Covid-19 underwriting provision of $86.6m that helped drag its net profit down from $276m for the first quarter of last year to $190m for the same period this year. During the call with analysts, CEO Marc Grandisson said Arch feels secure that it has a “very small” number of BI policies that do not contain specific virus exclusions and is confident its future position will be bolstered by a further hardening in markets. On the topic of BI exposures, Mr Grandisson added: “These reserves were recorded across a limited number of lines of business, such as property, where we have a very small number of policies that do not contain a specific pandemic exclusion and/or explicitly afford business interruption coverage under a pandemic and trade credit.”

Covid-19 provisions continue to hammer insurer earnings but balance sheets secure for now

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