Stunned by the rampant impact of the coronavirus outbreak, the rating agencies are increasingly growing anxious about life insurers. On Mar 16, 2020, AM Best revised its U.S. life/annuity industry’s market segment outlook to negative.
A couple of days later, A.M. Best announced that it will develop a coronavirus stress test to measure the scope and complexity of potential losses for life insurers, and its bearing on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities.
The rating giant confirmed that the current economic conditions pose a greater challenge to the balance sheets of life/annuity insurers than those dealing in property/casualty or health insurance.
However, A.M. Best reiterated that the insurance industry with respect to its liquidity profile is presently much better off than it was during the last economic crisis, which occurred in 2008-2009.
Another rating firm Moody’s Investors Services is also of the opinion that if the economy slows down drastically, business volumes of life insurers might take a hit. They may also face higher claims for certain types of insurance including trade credit and event cancellation insurance. Moody’s management stated that it also expects weaker investment returns on insurers’ investment portfolios including losses on equity exposures.
Fitch Ratings has in fact downgraded the rating outlook for US personal lines insurer Allstate Corporation and its core insurance subsidiaries to stable from positive. Given insurers’ huge exposure to life insurance business, the space is likely to endure vulnerability from interest, equity and mortality risks.
Risks Aplenty: An Overhang on Life Insurers
The economic plight forcing the Federal Reserve to slash its federal fund rates to 0-0.25% makes life insurers prone to interest rate risks. Low interest rates are identified hazardous for life insurance companies, given their rate-sensitive products and investments. Interest rate risk can materialize in various ways, impacting life insurers' earnings, capital and reserves, liquidity and competitiveness. In times of persistently low interest rates, life insurers' income from investments becomes insufficient to meet the contractually guaranteed obligations of policyholders, which cannot be lowered.
Moreover, the rising number of COVID-19 cases pose a mortality threat to life insurers. A spike in mortality would induce higher claim payments by life insurers, which might drain their underwriting incomes.
Also, business losses from disruption in demand and supply and lockdown of several factories, facilities, stores and shops prompted companies to slash their earnings targets, weighing on the global GDP in the process. This rendered volatility to equity markets, which also affects life insurers’ investment income because of their investments in equity.
Insurers Roll Up Their Sleeves
Meanwhile, insurers took measures to limit the risk stemming up from the coronavirus-related claims by suspending the sale of insurance policies to customers with a travel history to regions having experienced widespread outbreaks, such as China, Iran and many European countries.
Lincoln National Corp. LNC and American International Group Inc. AIG are among those industry players that already imposed a 30-day waiting period on customers who are probable coronavirus suspected cases.
Insurance industry could not escape the coronavirus-led disruption, and has lost 45.2% year to date compared with the Zacks S&P 500 composite’s decline of 25%. Stocks in the space, namely Lincoln National and American International have shed 67% and 59.8% of value, respectively.
The near-term scenario for life insurers doesn’t seem to be sanguine either. In fact, some better-placed entities are those from the property and casualty space, such as Cincinnati Financial Corporation CINF, Kinsale Capital Group, Inc. KNSL, Markel Corporation MKL and Axis Capital Holdings Limited AXS, each carrying a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Lincoln National Corporation (LNC) : Free Stock Analysis Report
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