There are various points of view regarding the long term effects on the global economy from Coronavirus. Within the insurance sector there are undoubtedly a series of claims on the horizon later in 2020, and a almost certainly a decline in Commercial and Travel insurance revenue.
Travel expert Simon Calder commented in the media yesterday that `2019 would be seen one day as the peak for the travel industry, where great value holidays were available to all. Things are going to look very different in the future.’
But insurance companies also invest a great chunk of profit every year in stock markets and bonds, to generate income for life insurance policies and pension plans. The sharp decline in stock markets around the world has reduced the value of those assets, and crucially, future dividend payments. Governments are all borrowing money to pump their local economies and support companies over the next three months or so – but what happens after that emergency aid?
Moody’s offered some comment on the US market after intervention by the Fed;
On 23 March, the Federal Reserve Board (Fed) rolled out a wide range of tools to offset the funding difficulties and liquidity challenges of financial institutions, corporate borrowers, and municipalities brought on by the coronavirus pandemic. The Fed’s actions facilitate new lending to investment grade corporate borrowers and support corporate bond market prices, thereby improving liquidity in the bond markets and mitigating some of the downward pressure on a portion of the insurance industry’s corporate bond holdings.
Most insurers started 2020 with healthy capital levels and asset quality. The fallout from the coronavirus outbreak has led to a dramatic slowdown in the global economy, accompanied by ultra-low interest rates, equity market declines, and a deterioration in corporate credit, the combination of which pressure the credit profiles of life insurers. While sizable downside risks remain, supportive fiscal actions by the Fed as well as monetary policy measures will likely aid overall economic recoveries with above-trend growth in the second half of 2020 and into 2021.
These actions will also mitigate credit deterioration and support liquidity in
life insurers’ investment portfolios.
A vast majority of the insurance industry’s asset portfolio contains investment-grade corporate bonds. However, US life insurance companies have become more susceptible to negative ratings migration over the past few years. Primarily this is due to a decline in the credit quality of the investment-grade portion of their fixed income portfolios. The investment allocation to Baa-rated bonds has increased to more than one-third of total bond holdings. The exhibit below shows the ratings distribution of US life insurers’ bond portfolio. Baa-rated bonds (NAIC 2) represented 34% of total bonds as of year-end 2019, up from 27% as of year-end 2009.
The Fed established the Secondary Market Corporate Credit Facility (SMCCF) to support credit to employers by providing liquidity to the market for outstanding corporate bonds. The SMCCF will purchase in the secondary market, corporate bonds issued by investment grade US companies and US-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for US investment grade corporate bonds.
The SMCCF would support corporate bond market prices and provide additional liquidity to those corporate bond holdings. Rating actions on corporate issuers will be more tempered for higher-rated companies that are likely to benefit from policy intervention or extraordinary government support. Alleviating negative ratings migration for those corporate issuers that are currently rated at the low end of the investment grade spectrum is especially meaningful for life insurers because falling to below investment grade would lead to much higher risk-based capital charges for the insurance industry.