Industry

Industry Reports Q1 Results

Brokers focus on liquidity, carriers discuss underwriting losses and other concerns.
By Andrea De Bono Posted on May 26, 2020

In Q1 earnings calls with brokers and carriers, early loss estimates, a sharp increase in business interruption claims, and poor investment returns were among the pandemic-related talking points.

On the broker front, many showed positive first-quarter results and strong organic growth for reinsurance businesses despite poor investment results. However, industry executives cautioned that the second quarter of 2020 will be more indicative of the full pandemic effects on the insurance market, especially due to an expected surge in COVID-related claims. In fact, despite the current positive numbers, Marsh CEO Dan Glaser noted that they expect a modest decline in overall revenue for the year due to the economic fallout from the pandemic.

 In response to the economic pressure, some companies will temporarily cut employee wages by 20% and executive salaries by 50% to protect cash flows. Other brokerage firms are cutting all discretionary spending as well as travel and entertainment expenses.

“To us, salary reductions […] are levers to protect liquidity. It’s kind of like survival mode stuff, [but for now we will] look to other actions,” Glaser said.

On the M&A front, it’s worth nothing that though Aon is pausing M&A activities for the rest of year, CEO Greg Case reassured shareholders that the AON-WTW merger will continue as planned and will be completed in 2021: “The logic of our combination [with Willis] has only been reinforced [by Covid-19],” Case explained.

Also of concern was the impact declining client exposure in the short term would have on revenue, mentioned by Gallagher. Though the brokerage noted that premium rate increases may offset declines.

 Group Organic GrowthInsurance Organic GrowthReinsurance Organic GrowthRevenue ($bn)
Aon5%4%9%$3.2bn
Marsh5%5%7%$4.65bn
WTW4.1%4%5%$2.47bn
Gallagher3.3%3.1%N/A$1.65bn

In regard to potential COVID-related insurance losses, Willis Towers Watson modeled four possible scenarios. According to the report issued by the brokerage, COVID-related losses could top Hurricane Katrina as the costliest disaster to insurers.

OptimisticModerateSevereExtreme
$11bn$32bn$80bn$140bn
WTW scenarios
($ in billions)OptimisticModerateSevere
BI/Contingency$4$11$23
D&O$1$2$3.5
EPL$1$2$4
General Liability-$1-$1.1$5.5
US Surety$0.2$0.5$1
Mortgage$0.5$2
Workers’ Comp$1.5$7$23
WTW scenarios

Carriers a Mixed Bag

The crisis has definitely slowed earnings and revenues for carriers as well, but most still enjoyed single-digit growth beating the latest forecasts. Some carriers, however, were highly affected by the negative returns from their investment portfolios following the most recent bear market and are already bracing for serious COVID-related insurance claims. According to the STOXX Sector Index, insurance industry stocks in the EU have fallen nearly 30% in 2020. Chicago-based carrier CNA is an example of this issue, posting a net loss of $69m in Q1, primarily driven by an investment loss of $169m.

Of course, the biggest concern for carriers comes from the uncertainty around claims and litigation costs related to key lines of business—business interruption, workers comp, and general liability, to name a few. As of now, carriers have mitigated legislative risks effectively; however, losses could increase drastically if the courts rule that business interruption policies cover pandemic events. For example, London-based insurance underwriter Hiscox is currently facing the uncertainty of the UK courts over its disputed COVID-19 BI claims since 10% of its UK commercial policies have such covers in place. The company disclosed an $150mn impact from the pandemic if the lockdown lasts 6-months from March 2020, and $175mn if beyond.

Decreases in premium revenue and increased underwriting losses affected multiple carriers, though not all. Global carrier AIG was one of the few insurers to miss analyst forecasts by posting a 91% decline in its adjusted pretax income, to $172m from $1.85bn in first-quarter 2019. This is attributed in part to an 8.6% decrease in premium revenue (mostly coming from international operations). Also seeing decreased premium income was The Hartford, with a $10 million reduction in auto premium receivables. This contributed to its net income decreasing 57% over Q1 2019 to $273m, making it one of the hardest-hit insurers during the quarter. The company also noted $16 million in increased claims in short-term disability.

Also contributing to AIG’s performance was an increase in underwriting losses, including $272m of estimated COVID-19 related losses. AIG posted a combined ratio of 101.5%, including 6.9 points of CATs, of which 4.5 points related to forecasted COVID-19 losses.

Markel International was hit hard by event cancellation losses, coming in at $181 million ($172.5 million from international operations, the rest from U.S.). Markel’s Co-CEO Richie Whitt warned that the carrier’s event cancellation book “goes from wedding cancellation to the Olympics and Wimbledon.”  The carrier also was highly impacted by a reinsurance underwriting loss of $34 million.

“While it’s too early to gauge the ultimate size of loss, we believe Covid-19 will result in the largest individual cat loss the insurance industry has ever seen,” said Peter Zaffino, COO of AIG.

Operating profitability overall was a focus on multiple calls. For example, German-based carrier Allianz’s earnings were heavily defined by a €700m decline in operating profits caused by the impact of the pandemic. The company said that the pandemic has aggravated operating conditions in the P/C segment, which slowed to 1.8% growth over the previous year.

On the flip side, Berkshire Hathaway reported a 5.7% increase in operating profits over Q1 2019, reaching $5.9bn. And Chubb reported an increase in operating profits by $50m to $1.22bn, as well as an underwriting profit increase to $778m in its P/C division. Despite the positive first quarter, Chubb warned that the pandemic “will have a meaningful impact on revenue as well as net and core operating income in the second quarter and potentially future quarters.”

Overall, the insurance industry performed positively during the first quarter of 2020, showing earnings increases due to internal growth factors, signifying strong industry fundamentals when it comes to pricing, risk management and talent. However, the COVID-19 pandemic has brought to light new internal concerns, revealing minimal cash reserves and some coverage misinterpretation of BI policies.

With projected insurance industry and corporate losses ranging from $11bn to $140bn and from $15m to $750m respectively, insurers and brokers are facing liquidity pressures that will only be increased by the ongoing litigations for BI claims. Despite the socioeconomic uncertainties of the pandemic, the insurance industry continues to be dynamic and rife with opportunities to take advantage of.

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