Investment bank Berenberg issues warning as the Covid-19 pandemic continues to spread across the globe

Insurers are facing a squeeze on their solvency ratios as the coronavirus outbreak continues to hit financial markets and reduce asset values. That’s the view of investment bank Berenberg in its latest research note into the impacts of the pandemic on the insurance market.

Berenberg predicted that the solvency positions for five key insurers it analysed – Allianz, Generali, AXA, Sampo and Zurich – could fall by as much as a combined 28 percentage points as a result of the coronavirus outbreak.

The reason for this is because of the exposure insurers have to both the equity and bond markets.

“Insurers are mainly exposed to the Covid-19 crisis as a result of their invested asset base, in particular their exposure to corporate bonds and equities,” Berenberg wrote in its research report.

“Overall, we believe the market will focus on the net impact on solvency: the lower asset values means this is down 28 percentage points from December 2019, but this is still above each group’s target minimum and well above the action minimum, the level at which they would be forced to consider a dividend cut in FY 2020E.

“We have not considered migration risk, the risk of corporate bonds being downgraded by rating agencies, as government and central banks are boosting global liquidity and this should slow insolvencies. However, if rating agencies were to downgrade their ratings of issued corporate bonds, this would impact the insurers’ solvency.

“A downgrade to below investment grade significantly raises solvency capital requirements,” the bank added.

Solvency impact

Allianz and Zurich are expected to be the worst hit by the pandemic, with both insurers’ solvency ratios falling by a predicted 29 percentage points over the first quarter of 2020.

Despite this, Berenberg said this would still mean that all insurers in its analysis would remain above their individual solvency targets.

“Our conclusion is that, so far, the crisis means solvency is still above the normal minimum range and that there is no pressure to cut dividends for this factor – particularly since these are our estimates as of 23 March, and the expected earnings contribution through the rest of the year will add 6 to 8 percentage points to our estimates,” the bank wrote.

“In any case, we are still far above the level of solvency ratio, the 100% minimum level, where the regulator would have cause to take action.”

The bank added that underwriting profit would be less affected by the pandemic than solvency levels: “The insurance technical side is staying strong as the extra claims linked to the crisis and to the economic slowdown are relatively modest and there may be a part offset due to lower accident frequency in motor insurance.”