The Wall Street Journal - 20.03.2020

B12| Friday, March 20, 2020 THE WALL STREET JOURNAL.

More important, international

travel has become an increasingly

important part of Trip.com’s busi-

ness, especially after its acquisition

of British travel website Skyscanner

in 2016. International revenue ac-

counts for more than a third of the

company’s total. This segment re-

mains highly uncertain as the

Covid-19 outbreak spreads in Eu-

rope and the U.S., both popular des-

tinations for Chinese tourists. Aus-

tralia and New Zealand decided

Thursday to close their borders to

foreigners, as the European Union

did on Tuesday, and more countries

could follow suit to contain the vi-

rus’s spread.

The other risk is that the eco-

nomic fallout could hurt travel

spending. Leisure spending will be

the first in line for consumers to

cut during a downturn.

Being in the sector at the heart

of the current turbulence,

Trip.com’s shares are down 36%

this year, more than many other

Chinese tech stocks. But it has out-

performed many of its American ri-

vals. Investors may want to see

clearer skies before buying back

into Trip.com. —Jacky Wong

Banks Have Nowhere to Hide

European lenders’ stocks are back at levels last seen in the 1980s as investors struggle to size up the impact of shutdown

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

It is still way too early to take a

ride withTrip.com.

Due to the coronavirus pan-

demic, the Chinese online travel

company expects revenue this quar-

ter to drop 45% to 50% from a year

earlier, pushing its income state-

ment into the red. Yet that seems to

be less dire than investors had

feared. Together with better-than-

expected results for last quarter un-

veiled Wednesday after the market

close, the news pushed Trip.com’s

Nasdaq-listed stock up 11% in after-

hours trading.

But investors could be too opti-

mistic. The company, formerly

known as Ctrip.com, said things

have started to improve in recent

weeks as China gradually returns to

normal. There may be some pickup

in business travel, and many work-

ers may also have bought tickets to

go back to work, but it is likely that

a full recovery is going to take a

long time. There are still many

travel restrictions in place in many

cities and packaged tours are still

banned. Companies will reassess

whether staff trips are essential and

decisions about leisure travel will

be more cautious.

These Insurers Might Resist Virus

Property and casualty is a relative bright spot in the sector

America’s job market just got a
hammer taken to it. How it fares in
the days and months ahead—and
what policy makers are able to do
to blunt the distress of workers and
their employers—will determine
how bad the recession will be and
how healthy the economy will be in
its aftermath.
The Labor Department on Thurs-
day reported the number of U.S.
workers filing new claims for jobless
benefits last week jumped to
281,000 from 211,000 a week earlier.
It was much higher than the 220,000
forecast by economists, who have
struggled to update their estimates
quickly enough to keep up with a
rapidly deteriorating situation,
marking the biggest single jump
since 2012, when Hurricane Sandy’s
aftermath sent many workers home.
Next week’s report will be far
worse. Thursday’s report reflects
claims through the week ended last
Saturday, before California’s Bay
Area was placed on lockdown in an
attempt to mitigate the spread of
the new coronavirus, when many
school districts, including New York

late that, when the number of con-

tinuing claims—the number of peo-

ple continuing to receive weekly

unemployment benefits after initially

filing—rise by 11.5% above their min-

imum level over the past year, a re-

cession is in the offing. Similarly, the

Sahm rule, named after economist

Claudia Sahm, says that if the unem-

ployment rises 0.5 percentage point

above its previous 12-month low, the

economy is in a recession.

Both Deutsche Bank’s measure

and Ms. Sahm’s will soon be

breached, and the only real ques-

tion is how quickly. Already many

economists, including Deutsche

Bank’s are forecasting that in the

second quarter gross domestic

product will experience its sharpest

drop since the end of World War II.

The more people who lose their

jobs, the more people will struggle

to pay for their needs, magnifying

the toll the pandemic has placed on

the economy.

As frightening as Thursday’s

number was, it is merely a preview

of how bad things are going to get.

—Justin Lahart

City’s, remained open, and when

the number of confirmed Covid-19

cases in the U.S. was significantly

lower than today. Some states have

reported a massive increase in fil-

ings this week.

Deutsche Bank economists calcu-

Initialclaimsforunemployment

insuranceintheU.S.,weekly

Source: Labor Department

300,000

0

50,000

100,000

150,000

200,000

250,000

Jan. 2020 Feb. March

Amid the carnage in financial
stocks, one group has emerged as a
relative outperformer: Property-
and-casualty insurers.
As a group, S&P 500 property-
and-casualty insurers—whose busi-
ness is insuring businesses and in-
dividuals against accidents and
other risks to themselves and their
property, and which includes firms
such asChubb,Travelers,Allstate
andProgressive—are down 29%
since the start of the year, versus a
more than 51% decline for life insur-
ers and 43% decline for banks as of
Thursday. This might seem surpris-
ing when people and businesses
around the globe are facing huge
operating risks and health burdens
as the result of an outside, unex-
pected force, the new coronavirus.
But it turns out that insurers
have long been crafting policies
that have limited exposure to pan-
demics, having learned from prior
episodes such as SARS. For exam-
ple, event-cancellation insurance of-
ten won’t typically include pan-
demic-induced disruptions. South
by Southwest, the canceled Austin,
Texas, festival, said its insurance
didn’t cover disease-related cancel-
lations. InsurerHiscoxhas said that
less than 10% of its event customers

opted for additional pandemic cov-

erage.

As the strains become increas-

ingly acute, and as political pres-

sure mounts on financial institu-

tions like banks and consumer

lenders to provide relief to custom-

ers, it is possible that insurers may

end up on the hook in more situa-

tions than anticipated.

“The longer disruption persists,

it is inevitable that (with lawyer in-

volvement) more claims will suc-

cessfully find their way around pol-

icy wording,” Autonomous Research

analyst Ryan Tunis wrote in a re-

cent note.

This week, analysts at Credit

Suisse are tracking a proposed

piece of legislation in New Jersey

that would require business-inter-

ruption insurance—which typically

requires some kind of property

damage, one thing the virus is un-

likely to cause—to pay out.

The bill hasn’t yet passed, and

may not be effective in practice ei-

ther, the analysts note. “Our sense

was this is more of a headline risk

as opposed to the state being able

to ultimately prevail in the courts

over contract law,” Credit Suisse

wrote. But it might not be the last

such effort.

However, property-and-casualty

insurers do have other defensive

properties. Their exposure to lower

rates and plunging stock prices is

relatively more limited than that of

life insurers. Autonomous estimates

a 5% earnings drag on average in

2021 for property-and-casualty un-

derwriters due to lower rates, fall-

ing stock prices and credit risk.

They also get some benefit from

the fact that people are doing less

of the kinds of things that cause

them to generate claims from day-

to-day life, such as driving. Credit

Suisse estimated that

Progressive could see quarterly

profit double versus expectations if

accident frequencies fell by about

25%. Its stock is down only 7% this

year.

A key thing to watch will be prop-

erty-and-casualty’s pricing upswing,

particularly in business insurance.

Insurers have many reasons to hold

the line, including the pressure of

lower rates and possible social infla-

tion, but customers will be under a

lot of stress, too. That could lead to

underwriting fewer exposures, which

limits earnings upside, but also

downside, too. In this market, there

isn’t much more you can ask for.

—Telis Demos

A problem for airlines is a prob-
lem for banks. A problem for oil
producers is a problem for banks. A
problem for restaurants is a prob-
lem for banks.
Sitting at the heart of the econ-
omy, banks are spared no pain.
They are usually protected by the
diversity of their lending—only one
or two industries or regions strug-
gle at a given time—but the wide-
spread economic shutdown to con-
tain the novel coronavirus is a crisis
for nearly everyone, everywhere.
Bank investors are understand-
ably nervous. In Europe, share
prices have nearly halved this year
and are back at levels last seen in
the 1980s, while the cost of insuring
against bank defaults using credit-
default swaps has been rising since
late February. Additional Tier 1 cap-
ital bonds—perpetual bonds that

can be converted into equity or

written off if the bank’s capital ratio

falls below a certain level—have

plunged around 20% or more this

month.

Holders of these AT1 bonds, also

called contingent convertibles or

cocos, could lose out if a lender

needs more capital. They pay high

interest rates to compensate for

that risk. Months ago that seemed

quite a safe bet to yield-hungry in-

vestors, but not anymore.

Lenders are much stronger now

than a decade ago. Since the 2008

financial meltdown they have built

up substantial capital under acute

regulatory scrutiny. Yet many are

still wondering if the buffers will be

big enough.

The root problem is that the

scale of the coming default wave is

impossible to assess. Even under

normal circumstances only a bank

truly knows its loan book.

Financial reports include more

information than before, so we can

glean a few things. In Europe, Dutch

lenderINGappears heavily exposed

to the troubled oil-and-gas industry.

So doBarclaysand three French

banks—BNP Paribas,Crédit Agri-

coleandSociété Générale—accord-

ing to analysts at RBC Capital Mar-

kets.

ery gear offers some grounds for

optimism about the length of the

U.S. and European lockdowns and

their economic impact. But the Chi-

nese rebound remains uncertain,

and Western economies, govern-

ments and lenders are fundamen-

tally different.

Investors probably won’t get a

proper read on the situation until

banks report first-quarter numbers

in April. Newish accounting rules

require European and U.S. banks to

book loan losses earlier than before.

Although this accelerated recogni-

tion could stoke fears and amplify

the cycle, it should also provide

valuable detail on which banks are

most exposed to the crisis.

One thing is certain: The next

bank earnings season will be the

most closely watched in years.

—Rochelle Toplensky

That tells only part of the story,

though. Are those loans for risky

new oil-exploration projects or

building a chemical plant? Is the

borrower a behemoth with rela-

tively low debt levels or a smaller

company sailing close to the wind?

Oil producers are a major con-

cern because they borrow billions

and are dealing with brutally low

prices. But what about a bank’s

loans to airlines, leisure companies

and even retailers? As Europeans

and Americans settle in at home to

work and play, many industries face

a cash crunch even in the best-case

scenario of a short lockdown.

Interest-rate cuts may help a few

borrowers and delay defaults in the

immediate crisis, but longer term

they make life harder for lenders

struggling to generate profits..

China’s apparent shift into recov-

Too Early to Check In

At China’s Online Travel

Leader, Trip.com

Share-price
andindex
performance,
year-to-date

Source: FactSet

Progressive

S&P 500

Property & Casualty

Insurance Sub Industry

S&P Banks

Select Industry

S&P 500 Life & Health

Insurance Sub Industry

10

–60

–50

–40

–30

–20

–10

0

%

Jan. 2020 Feb. March

The root problem is that

the scale of the coming

default wave is

impossible to assess.

The Employment Shock Begins

OVERHEARD

What do people do for fun

when they are locked inside their

homes to stop the spread of a dan-

gerous pandemic? Apparently, they

enjoy content about pandemics.

Netflix stock has been among

the better performers in the con-

tinuing bear market, perhaps be-

cause those confined indoors are

streaming more video. More sur-

prising is what they are watching:

On Netflix’s current “popular”

list is the documentary series

“Pandemic: How to Prevent

an Outbreak.” Released two

months ago, it narrates ef-

forts to bat-

tle infec-

tious

viruses in

emerging

nations.

The cor-

onavirus is

entering popu-

lar culture. In

January, the mobile

game Plague Inc. became the top

paid app in China’s version of Ap-

ple’s App Store. Now the board

game Pandemic has risen to a top-

two trending position at Board-

GameGeek.com, a popular forum.

The game’s publisher, Z-Man

Games, isn’t traded, but would look

like a savvy investment right now.

“If you are stuck at home because

the world is burning due to a

pandemic, what more ap-

propriate board game is

there?” writes a user

who goes by the

name of Captain Mc-

Gee on the site’s fo-

rum.

The saying

goes that there is

never too much

of a good thing.

It seems as

though there

isn’t too much

of a bad thing,

either.

Share-priceperformanceofonlinetravelcompanies,pastsixmonths

Source: FactSet

Trip.com

Booking

TripAdvisor

Expedia

20

–80

–60

–40

–20

0

%

Oct. 2019 Nov. Dec. Jan. ’20 Feb. March

NETFLIX