The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
The second quarter of 2020 might prove to be the most critical results season in recent history for the insurance industry. After all, this is the quarter where the initial impact of the coronavirus pandemic on insurers’ profits has become clear, highlighting the extent of the fallout that the global health crisis has brought on insureds via claims and insurers via their exposures through investments.
Segments of the industry have been impacted in different ways by the pandemic, so this global round-up of Q2 and H1 results has broken down the industry into brokers, international insurers, and regional ones.
Brokerages on the whole haven’t felt the brunt of the coronavirus impact, likely because their services are more important than ever in terms of advising clients on risk management and insurance solutions in this risk-laden environment, and they aren’t exposed to losses from claims, like their carrier counterparts.
Let’s start with the biggest global broker’s results. Marsh & McLennan Companies (MMC) reported that its Q2 operating income rose 30% to US$885 million, and its adjusted operating income jumped by 10% to US$984 million. The risk and insurance segment of the business did particularly well, with Marsh seeing a revenue stream of US$2.2 billion, an increase of 1% on an underlying basis, and Guy Carpenter revealing revenue of US$433 million, an increase of 9% on an underlying basis.
Marsh’s rival Aon didn’t report such extensively positive results, but it did have many bright spots in its figures. The brokerage giant’s total revenue fell by 4% to US$2.5 billion while organic revenue declined by 1%. However, net income from continuing operations attributable to Aon shareholders came in at US$397 million, versus US$277 million in the same period last year, and its operating margin, earnings per share, and cash flows all showed movement in a positive direction.
At the bottom of the Q2 results pile is Willis Towers Watson (WTW), Aon’s soon-to-be partner. Net income attributable to WTW for the April-June period was US$94 million, or 32% lower than the US$138 million posted in Q2 2019. Nonetheless, it noted that attributable net income and diluted earnings per share for Q2 included pre-tax US$14 million of transaction and integration expenses mostly related to the pending business combination with Aon. More broadly, revenue in the second quarter grew 3% to US$2.11 billion.
Ending on an exceedingly positive note, Arthur J. Gallagher & Co. (AJG) reported strong financial results for the quarter ending June 30, 2020, unveiling earned adjusted net income of US$229 million, up from US$164.1 million in Q2 of 2019. The successful second quarter resulted in a half-year gain for AJG, with the brokerage reporting adjusted net income of US$567.3 million for the first six months of 2020, up from US$462.8 million in the same period in the prior year.
Insurers operating on a global basis were handed a more mixed bag with their results due to the many claims arising from the pandemic.
Zurich Insurance Group’s interim 2020 results showed a business operating profit of US$1.7 billion – a 40% drop from last year’s H1 result of US$2.8 billion. A large chunk of this can be attributed to the impact of the coronavirus, which was pinpointed for US$686 million of the fall.Meanwhile, net income attributable to shareholders came in at US$1.2 billion – down 42% compared to last year’s US$2 billion during the same period. Property and casualty estimated claims from COVID-19 came in at US$750 million.
Similar trends appear across many global insurers’ results. QBE Insurance Group plunged into the red for the first six months, posting a net loss after tax of US$712 million in H1. The result for the half year ended June 30 also included a US$90 million investment loss, which was a massive fall from 2019’s US$755 investment profit.
Liberty Mutual was also hit hard in the second quarter, with Liberty Mutual Holding Company Inc. and its subsidiaries (LMHC collectively) suffering US$320 million in net loss attributable to LMHC for the three months ended June 30. The figure signifies a nosedive from the attributable net income of US$397 million enjoyed by the group in the same quarter last year. Moreover, incurred losses for COVID-19 amounted to US$529 million in the quarter, with roughly half of these losses related to event cancelation.
Another insurer on the hit list was AXA, which saw underlying earnings drop by 48% and gross revenues slip by 10%, leaving it with net income of US$1.69 billion – a 39% fall from the same period last year when it recorded US$2.77 billion in net income. At the same time, competitor Allianz SE reported that net income attributable to shareholders in Q2 fell 28.6% to US$1.77 billion and in the three-month span covered by Q2, the firm experienced a 6.8% decline in total revenues to US$36.5 billion.
On an even more negative note, AIG suffered a net loss attributable to common shareholders of US$7.9 billion, which was primarily driven by a US$6.7 billion after-tax loss from the sale and deconsolidation of Fortitude and US$1.8 billion of after-tax net realised capital losses primarily related to mark-to-market losses.
Insurance giant Chubb likewise didn’t escape unscathed, suffering a US$331 million net loss – a plunge from the US$1.15 billion net income enjoyed by the insurer in the same three-month span last year. Chubb also said net catastrophe losses in the period amounted to US$1.51 billion after tax. Of that total, US$1.16 billion was coronavirus-related catastrophe losses.
One of the standouts from this results season was Berkshire Hathaway. In the second quarter of 2020, it enjoyed US$26.30 billion in net earnings attributable to Berkshire shareholders – a major rebound from Q1’s US$49.75 billion attributable net loss. The amount also signifies a significant improvement from the earnings US$14.07 billion made in last year’s second quarter. Nonetheless, the first-half numbers tell a different story for Berkshire. For the six-month span, it was hit with a US$23.45 billion net loss attributable to shareholders. In the same period in 2019, the group posted attributable earnings worth US$35.73 billion.
Despite all the doom and gloom, insurance leaders are still optimistic that their companies will stay standing (and growing) during the pandemic. Zurich’s Mario Greco called the first half of 2020 “an unprecedented period with unforeseeable events ranging from a global pandemic and recession, to civil unrest and a higher rate of natural catastrophes,” while pointing to strong growth across commercial insurance gross written premiums as an indicator that the group is still well positioned.
Liberty Mutual chair and chief executive David Long had this to say: “Despite these extraordinary events, our core combined ratio in the quarter improved 4.6 points to 89.1%, and we are encouraged by the continued market firming in commercial lines which should only accelerate as COVID-19 weighs on industry profitability.”
The picture looked slightly better for insurers with a regional focus in this quarter, though the results landed across a spectrum of “good,” “not bad,” and “could be better.”
Admiral Group, one of the largest car insurance providers in the UK, reported that its share of profit before tax jumped by 30% to £286.7 million – a climb from £220.2 million one year earlier. That left it with statutory profit before tax of £286.1 million, a 31% leap. Similarly, Ageas UK saw its GWP grow significantly in the household segment on the back of new deals in the broker distribution segment. But, income in the motor segment dropped as a result of what the firm described as “disciplined underwriting” in response to claims inflation, as well as a need to reduce pricing due to the decrease in mobility that accompanied the coronavirus lockdown.
RSA Insurance Group also bucked the overall trend of loss, with the insurer posting a first-half operating profit rise of 13% compared to H1 2019, while Intact Financial Corporation, in Canada, revealed that net operating income per share was up 63% to $2.35. It also saw premium growth of 7% following the impact of relief measures and including The Guarantee Company of North America acquisition.
Aviva Canada likewise delivered a solid H1, reporting net written premium growth in general insurance and a combined operating ratio (COR) of 95.5%, down from 98.1% in the first half of 2019. The firm did take a hit in the second quarter from COVID-19 and the negative impacts of the economic shutdown, but as CEO Jason Storah stressed: “When you strip out the impacts of COVID […] we had really good underlying momentum, both in top and bottom line [growth].”
At the other end of the spectrum, Insurance Australia Group (IAG), the largest general insurance company in Australia and New Zealand, posted an underlying insurance margin and a reported insurance margin of 16% and 10.1%, respectively,for the year ended June 30 (FY20). Both figures are down compared to the corresponding numbers in 2019.
Though Q2 was significant, the fallout from the pandemic won’t truly rear its ugly head until the dust settles – the dust being the fate of the many lawsuits filed around the world by commercial insureds claiming business interruption losses.
Some signs are pointing to more losses ahead. In the US, a federal judge in Missouri recently ruled that hair salons and restaurants can sue their insurer for business interruption losses caused by the COVID-19 pandemic. In Paris, a court made headlines after it ruled in favour of a restaurateur in the policyholder’s business interruption (BI) claim with France-headquartered insurance group AXA. And while the insurance industry holds its breath for the ruling from the Financial Conduct Authority’s business interruption test case in the UK, the Hiscox Action Group (HAG) just claimed a victory in its pursuit of Hiscox Insurance through the High Court.
As a result, this is far from the last noteworthy quarter for the insurance industry. Only time, and Q3 and full-year results, will tell the full extent of the damage from COVID-19