The COVID-19 crisis dented earnings for GMIs in 2020. Thanks to their good base of recurring profitability, we see a recovery in earnings in this and in coming years once vaccinations increase and the pandemic abates. S&P Global Ratings calculates that for the 16 GMIs we rate, net income fell about $8 billion in 2020 on net profit of $36 billion due to the pandemic. To put this into perspective, GMIs reported a much larger overall decline of nearly $20 billion in net income. In addition, this does not include all of the financial consequences of the pandemic, which could include unrealized capital gains, reserve adequacy, and new business volume and value. A number of players, notably in the life business, did not single out the pandemic in their financial reporting as a key driver.

As we had believed, the crisis has turned out to be an earnings event for GMIs, and a manageable one--not a serious capital event. That is, no insurer in this group fell into a position where its capital resources became insufficient to meet expectations by regulators, who would have advised the company to materially reduce its risk exposure or find additional capital resources. Beyond 2020, we believe additional COVID-19-related losses could be manageable, given that GMIs reported a large share of incurred but not reported losses in 2020 earnings, and also due to the exclusion of pandemic claims that insurers have added to the terms and conditions of policies renewed in 2021.

Since the end of 2019, most ratings on GMIs have been affirmed and other rating actions have so far been limited to one downgrade, one upgrade, one outlook change, and one Credit Watch placement, only one of them directly prompted by the pandemic.

Non-Life Activities Took More Of A Hit

Overall, the pandemic took more of a toll on non-life than life activities. That's because there is a large negative correlation between people insured against death and the segments of the population who have died from COVID-19 or other conditions that led to excess mortality. These groups notably include old people, who are less likely to have term life insurance, and lower-income people, who are typically less likely to be partly or fully insured.

In contrast, non-life commercial lines were hardly hit. A few products concentrated most of the pandemic's negative effects on underwriting: business interruption; event cancelation; and, to a lesser extent, credit insurance. And that's despite the large reinsurance policies that primary players typically purchase to lessen the potential impact of tail risks.

On the other hand, underwriting results increased for some non-life personal lines as the frequency of incidents, notably in motor insurance, dropped as lockdowns took large numbers of cars off the streets.

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Reinsurers Racked Up Big Losses

The profitability of large reinsurers slid even more, on average, than for the GMIs. This is because reinsurance policies, especially in commercial lines, covered a large share of primary insurers' exposure. For the Top 20 reinsurers we rate across the world, we estimate COVID-19-related losses at about $20 billion, which corresponds to nearly four times their year-end 2020 aggregated net profit.

European GMIs faced steeper losses than those in other regions

Despite being highly diversified, European GMIs suffered more than players domiciled in other regions, yet a large part of their losses came from non-European markets. The higher losses for several European GMIs such as AXA, Allianz, and Zurich came mainly from their large commercial property/casualty (P/C) lines. Overall, aggregate losses posted by the three most exposed players (AXA, Allianz, and Chubb) accounted for more than half of the $8 billion loss for the 16 GMIs.

One-offs also pulled down profitability in 2020

GMIs posted an aggregate net profit of $36 billion in 2020, down from $56 billion in 2019 and $48 billion in 2018, but still solidly positive (see chart 1). The decline in profit was not meaningfully influenced by currency exchange rate movements as the U.S. dollar was broadly stable last year against all other reporting currencies, compared with year-end 2019.

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As we discussed above, part of the decline in profit was due to the effects of the COVID-19 pandemic. However, negative one-offs posted by several players, notably in the U.S., accounted for a bigger slice. Depending on the insurer, these nonrecurring and often sizable items have taken various forms such as losses posted on divested entities, goodwill impairments, or the mark to market of financial instruments--and they are largely unrelated to COVID-19. We believe the limited profit declines resulting from COVID-19 generally show the benefit of running diversified businesses, in terms of both product lines and geographies, as the pandemic clearly affected some activities much more than others. It also indicates that GMIs are managing their risk exposure in a sophisticated way and were able to calibrate their risk appetite to reduce the erosion of their financial metrics from such an unexpected event.

Strong Underlying Profitability

For a number of players, such as AXA, Allianz, Zurich, or Mapfre, net profit in 2020 would have been stronger than the year before without the appearance of COVID-19 because of their strong underlying profitability. For some others, such as Manulife, Aviva, or Prudential PLC, profitability was even stronger in 2020, despite COVID-19. This reflects the robustness of the business model of GMIs, which relies on competitive advantages leading to solid business positions. This helps generate recurring profitability even amid financial market volatility. As vaccinations proceed, we believe the financial impact of COVID-19 should lessen, supporting an earnings recovery for many GMIs in this and the coming years.

We've Taken Few COVID-19-Related Rating Actions

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Table 1

We have affirmed most ratings on GMIs since the beginning of the pandemic in first-quarter 2020 because of our view that the economic and financial fallout would not likely weaken creditworthiness enough to justify downgrades or revisions of outlooks to negative, for instance. We have taken a few negative rating actions since then, mostly prompted by COVID-19-induced recessions, although others were unrelated.

For example, the impact of the crisis on financial markets was the main reason why we revised the outlook on Tokio Marine group to stable from positive in April 2020. By contrast, our downgrade of Aegon in February 2020 mostly reflected our view of weaker recurrent profitability than for 'AA-' rated peers due to stagnant business volumes, high ongoing restructuring costs, and intensifying competition.

Similarly, the placement of AIG's P/C entities on CreditWatch with negative implications in October 2020 was mostly due to the potential loss of business and earnings diversification of its life and retirement operations, which the group is expected to divest. Another factor is uncertainty about AIG's future expense structure, the underwriting performance of its remaining P/C operations, as well as the capital structure.

Lastly, the negative consequences of the crisis did not prevent us from upgrading Zurich Insurance to 'AA' from 'AA-' in March 2021 to reflect the group's balance sheet resilience, capital allocation discipline, and consistently strong and resilient operating performance, compared with those of other GMIs.

COVID-19's Impact Goes Beyond Net Income

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If the impact of COVID-19 on the income of GMIs was manageable in 2020, its consequences on their financial strength are further reaching. Indeed, the most meaningful consequences of the pandemic were on the financial markets. Across the globe, long-term interest rates have tumbled, even into negative territory for some. That has accelerated the dilution of fixed-income investment yields for GMIs. This has not only hurt revenue from segments such as the general account savings business, but also from long-tail P/C lines such as general liability.

Given its long-term nature, the underlying economic profitability of the savings business is more accurately measured through the determination of the present value of existing business' future profit. Accordingly, profitability is extremely sensitive to assumptions about long-term interest rates. As such, the value of new business underwritten during 2020 as well as the expected profitability of the existing books has declined. This represented a large decrease for players with higher exposure to products sensitive to interest rates. In addition, new business volume fell during lockdowns when insurance sales offices were closed and declines in purchasing power by economic agents led to lower saving capacity. That said, it is difficult to ascertain whether insurers will permanently lose this revenue or whether they can offset losses with incremental increases in premium during the expected recovery as the pandemic winds down.

The long-tail P/C business also suffered from lower interest rates. Although profitability is largely derived from underwriting, claims are usually paid slowly and for some segments in the form of annuities. As such, technical reserves are dependent largely on assumptions about long-term interest rates. With interest rates reaching lower levels, insurers were obliged to add to reserves. Some GMIs, with exposure to such activities, had to increase technical reserves in 2020. That said, the effect on income was not always visible given the frequently conservative nature of their reserving policies, which led to a reduction in their reserving buffers.

COVID-19-driven declines in the stock market also took a toll on the balance sheets of GMIs, though the hit to income was not as significant. In many cases, we just observed a decline in realized capital gains on equity investments in 2020, with no major consequences for profitability. That said, unrealized capital gains for this asset class decreased for many players, which reduced reported shareholders' funds as well as solvency ratios. Because of the market's recovery after the first quarter of 2020, this decline remained manageable from a year-end standpoint. Nevertheless, the market drop could have weakened the capital adequacy of many GMIs if the recovery had been delayed.

To preserve capital adequacy as the crisis broke out, and when it was uncertain how long it would last, a number of GMIs such as Aegon, AXA, Prudential Financial, and MetLife took actions to restrict dividends or reduce their share buyback programs. Some GMIs took these moves independently and others were influenced by regulators. Dividend restrictions were mostly implemented by GMIs domiciled in Europe, the Middle East, and Africa. That said, only a few GMIs took such decisions. Most of them, notably in North America and Asia, have so far kept their dividend policy unchanged.

COVID-19's Impact Will Still Be Visible In 2021 Earnings

We expect the economic and financial shocks of COVID-19 to remain visible in the earnings of GMIs in 2021, although less so than in 2020 as vaccinations increase and the pandemic weakens in the world's largest insurance markets. Our view also takes into account changes to the terms and conditions for commercial insurance policies, including the insertion of exclusions for pandemic-related claims, and increases in tariffs, especially for the most-affected business segments, such as business interruption or event cancelations. On the other hand, insurers are likely to see an increase in claims in personal lines, especially motor, as lockdowns end or loosen up. They may also see a rise in health insurance claims due to medical treatments that were delayed in 2020 when medical institutions focused on serious cases of COVID-19. All in all, we anticipate a recovery in earnings this year and next as the pandemic comes under control.