Impact of coronavirus on insurers

[mattee2264]

 

Lloyds' of London is projecting 2020 underwriting losses of $107BN and falls in investment portfolios of an estimated $96BN bringing total projected losses to $203B for the industry.

 

These sound like pretty big numbers but I am struggling to put them into context and assess the implication for the valuation of my insurance holdings such as Berkshire, Markel and Fairfax and AIG.

 

Where are the underwriting losses coming from? Loss of rent and business interruption and health insurance and life insurance payouts are the most obvious examples that come to mind. But I would have thought for most P&C insurers these are not a large chunk of their business.

 

9/11 triggered a bad year for the insurance industry as well. What was the scale of the losses then and what was the impact on Berkshire, Fairfax and Markel's stocks and how quickly did they recover?

[meiroy]

 

 

[ukvalueinvestment]

I think we are starting to see why Buffett is cautious ... ?

[mattee2264]

Interesting. I guess the difference with natural catastrophes is that most businesses probably have grossly inadequate coverage. For example most property insurance policies only allow claims in the event of damage to the property.

 

But it is a shame no one properly questioned Buffett about the impact of coronavirus on the insurance operations. That would have been quite illuminating.

 

 

[gfp]

I think we are starting to see why Buffett is cautious ... ?

 

I found it interesting that during the annual meeting the only thing he sounded extremely confident in was Berkshire's insurance reserving.  Perhaps next quarter shows a different result, but I don't think Buffett expects Berkshire to have huge losses from Covid-related business interruption.  I'm sure there will still be plenty of claims, event cancellation, etc...  Companies that were willing to insure against pandemic risks (like Berkshire) ought to be less likely to have been inadvertently covering it without compensation.  Still have to pay for the litigation of course.

 

Berkshire can write a lot more business if this creates a hard market - and its hard to see how this doesn't finally get us the mythical hard market conditions.

 

Having a huge insurance business that basically re-insurers the past and not the present offers a nice diversifier when comparing Berkshire's size / risk from Covid claims to other big insurers who don't write enormous retroactive policies.

[UK]

Becky Quick: (02:47:14)

This next question comes from Steven Staller. He’s a shareholder in Atlanta, Georgia and he says, “Would you please help us understand the effects of COVID-19 are on our insurance businesses? Other insurance companies have reported losses from boosting reserves for future insurance claims that they expect to be paying as a result of Coronavirus. Yet in Berkshire’s 10Q released this morning, we do not appear to have reported much of these future expected losses. Can you tell us why this is the case? What kind of risks Berkshire is underwriting that allows us not to be affected by the pandemic or conversely, what we are writing that might be?”

Warren Buffett: (02:47:47)

Well, the amount of litigation that is going to be generated out of what’s already happened, let alone what may happen, is going to be huge. Now, just the cost of defending litigation is huge, enormous expense, depending on how much there is.

Warren Buffett: (02:48:08)

Now, in the auto insurance field, which is our number one field in terms of premium volume by some margin, that’s more definable, but who knows what comes out of it in terms of litigation. But in what they call commercial multiple peril, which involves property losses and where some people elect to buy business interruption experience coverage, many policies quite clearly in the contract language would not have a claim for business interruption under a commercial multiple peril policy where you’ve elected that. But other policies do I know of, I think I know of one company. I don’t know the details, that’s written a fair amount where they cover or they certainly there’s a good argument perhaps that they cover business interruption that might arise from a pandemic.

Warren Buffett: (02:49:26)

Well, they’re in a very different position than the standard language which says that you recover for business interruption only if involves physical damage to the property. And you can buy all kinds of different policies. We are not big in the commercial, multiple peril business.

Warren Buffett: (02:49:47)

So I mean, this is not like our auto business or anything of that sort, but we will have claims. We’ll have litigation costs, but proportionally it’s not the same with us as with some other companies, which have been much more…

Warren Buffett: (02:50:03)

…those with some other companies which have been much heavier in writing business interruption as part of a commercial, multiple peril. But you don’t automatically get coverage if you have business interruption. I mean for example, I think it would be unusual if say General Motors had a strike, which they did, and that they have business interruption that covers a strike. We actually wrote about, probably the only annual report in the United States, we wrote about business interruption insurance because we had it over in France, when one of our properties was adjacent to a much smaller property that had a fire and then it spread to our plant and it caused a lot of physical damage and we have business interruption that ties in with that. But if we had some company we were selling auto parts to and they had a strike, our business would be interrupted, but that is not part of the coverage, unless you specifically really buy it. So, there’s some claims that are going to be very valid and related to the present situation. There’ll be an awful lot that there’ll be litigation on that won’t be valid.

Warren Buffett: (02:51:18)

And, there’s no question that some insurance companies, I know one particular, that will pay a lot of money relative to their size, in terms of policies that they’ve written. And I think we have reserved, and our history shows we generally have reserved on the conservative side, adequately at least. And that’s certainly our intent. And we tell no managers of any of our insurance operations, what numbers we expect from them or do any of that. They evaluate their losses and they build in something for social inflation. They build in things for all kinds of things. And generally speaking, Berkshire has been pretty accurate in its reserving. And, I have no reason to think that we’re otherwise than that, currently.

 

[gfp]

Yes - the above is exactly what I was referring to.  That made me feel pretty good about Berkshire's prospects and ability to use this as an opportunity to grow the Insurance biz.  Time will tell.  Its not a bunch of dummies running the place, thank god

[mattee2264]

 

That is reassuring and should create an opportunity if the market tars all insurers with the same brush. How are Markel and Fairfax positioned in terms of their exposure?

[Foreign Tuffett]

Emerald is in the B2B trade show business. Per presentation filed yesterday, it could receive up to ~$191 million for each of 2020 and 2021 from event cancellation policies.

 

https://www.sec.gov/Archives/edgar/data/1579214/000156459020026068/eex-ex991_16.htm

 

Similarly, Wimbledon is set to receive a 114 million GBP insurance payout. Insurers were picking up pennies in front of a steamroller here, as Wimbledon was apparently only paying 1.5 million GBP per year in premiums

 

https://www.insurancejournal.com/news/international/2020/04/13/564598.htm

 

I wonder probably how much of this business interruption/event cancellation insurance is out there? I wonder what underwriting assumptions were made. To what extent did insurers contemplate ALL events being canceled for months and months on end?