Allianz Global Corporate & Specialty faces an outlook downgrade from S&P Global Ratings.

The ratings agency revised its outlook for AGCS to negative from stable, while at the same time affirmed the insurer’s “AA” financial strength and issuer credit ratings.

The outlook revision reflects S&P’s view that AGCS will continue to see weak underwriting performance in 2020. It is also a response to S&P’s belief that plans by AGCS’s parent, Allianz Group, to significant improve underwriting results could be hampered by uncertainties regarding future reserving needs or long-term COVID-19-related consequences.

AGCS has embarked on a comprehensive program to improve its underwriting results from a combined (loss and expenses) ratio of 112% at year end-2019 and 117% at the end of first-quarter 2020, said S&P, noting that these levels are weaker than AGCS’ peers, such as Chubb, Zurich Group, or HDI Global.

AGCS’ strategy for improvement includes price increases as well as the cancellation of some unprofitable business, which is expected to significantly improve its combined ratios by 2022, said S&P. “This would support Allianz Group’s overarching target to bring the average combined ratio for the entire group’s property & casualty segment to 93%.”

The negative outlook reflects the possibility of a one-notch downgrade over the next 12-24 months if AGCS cannot materially strengthen its operating performance and underwriting results.

Effect of Non-U.S. Business on Performance

While S&P previously had assumed that weak underwriting results at the U.S.-based subsidiary Allianz Global Risks U.S. Insurance Co.(AGRUS) were the root cause of AGCS’ underperformance, the ratings agency said it now believes that is not the case. After the 2019 reserve strengthening of about €600 million (US$675 million) for the entire AGCS book, “we now believe that other regions and businesses outside the U.S., such as the liability business in Germany, are contributing to the group’s underperformance,” said S&P, explaining that these weaknesses could create further need for reserve strengthening in 2020.

Further, S&P acknowledged, the COVID-19 pandemic will likely drag down AGCS’ results in 2020, since the company faces claims related to event as well as film and TV production cancellations or postponements.

The negative impact from COVID-19 on 2019’s underwriting result could exceed €500 million (US$675 million), after a €233 million (US$262.1 million) loss in the first quarter.

“We expect AGCS will achieve profitability improvements, supported by the success of the recent price increases in the industrial-line business, for example,” added S&P. “However, we acknowledge the possibility that the overall results might be compromised by the uncertainties of future reserve strengthening, or by the magnitude of the repercussions from the coronavirus pandemic.”

S&P said AGCS’ ultimate parent company, Allianz SE, remains “highly committed to AGCS and its industrial business.” “This is evident, for instance, in the control and profit transfer agreement between both companies, as well as the reinsurance support from Allianz Group toward AGCS,” the ratings agency affirmed.

In its ratings announcement, S&P said the “AA” rating, with a negative outlook, remains unchanged for subsidiary Allianz Global Risks U.S. Insurance Co. (AGRUS) and its intercompany pool members. S&P also affirmed its “AA-” long-term ratings on Allianz Risk Transfer AG (ART AG) and Allianz Risk Transfer (ART Bermuda), with stable outlooks. Further, S&P affirmed its “BB+” ratings on Allianz Global Corporate & Specialty South Africa Ltd., with a stable outlook.

Allianz’ ART companies (ART AG and ART Bermuda) are strategically important to the group, given their unchanged role as providers of alternative risk transfer solutions, said S&P, noting it expects the ART companies will remain profitable over the coming few years.

Source: S&P Global Ratings

*This story ran previously in our sister publication Insurance Journal.