Insurance coverage is meant to help us bridge unexpected gaps. When disaster strikes — be it a car crash, poor health or even a flood or fire — an insurance policy can help keep the financial side of our lives in order. So it made sense that when the COVID-19 pandemic rippled across the globe early this year, investors were initially nervous about the insurance industry.
Those concerns were manifest in February, when insurers’ share prices tumbled alongside the broad market. Investors feared that the industry would face significant losses, but then something curious happened: Many insurers reported stronger than expected earnings for the first quarter.
Though COVID-19 added to the industry’s obligations, it also contributed to lower insurance utilization rates because consumers spent less time on the road or at work, and they visited the doctor less often. Additionally, unrelated to the pandemic, insurers had built reserves in recent years, which helped provide stability amid the outbreak. These trends have lent resilience to the industry and suggest that it could enjoy some long-term tailwinds.
Of course, the industry still faces potential pitfalls. The pandemic is still with us, and it’s unclear how long it might persist or what course it could take. Some policies, such as those for business interruptions, could be more expensive for insurers than anticipated. And medical insurers are particularly sensitive to potential changes to health care regulations — which could prove significant during an election year.
Still, at current valuations, many well-capitalized and well-managed insurance companies may offer tantalizing long-term opportunities.
Although COVID-19 has added to overall insurance claims, it’s important to keep those payouts in perspective, says Patricio Ciarfaglia, a Capital Group portfolio manager who also researches the global insurance industry as an investment analyst.
“These companies receive millions of claims a year,” he says. “Claims are up, but they’re not hugely out of proportion for a normal year.”
Additionally, the unusual circumstances around the pandemic have unexpectedly offset some costs. The economic shutdown has kept drivers out of cars and workers away from job sites; as a result, there have been fewer accidents on the road and at work.
“These are small claims, but they add up,” says Aline Avzaradel, an equity analyst who covers U.S. insurance companies. “There’s still a lot of uncertainty right now, so insurers are building extra cushions. But indicators are saying claims should be less than what they’ve reserved for.”
Medical insurers have especially benefited from low utilization this year, says Cheryl Frank, an equity analyst and portfolio manager who researches health care services. Many people have avoided doctors’ offices and put off noncritical procedures, reasoning that the novel coronavirus was too great a risk.
Even before COVID-19 became a worldwide problem, property and casualty insurance companies had faced a tumultuous couple of years. In 2017 and 2018, wildfires in the American West, hurricanes in the Southeast and typhoons in Asia taxed cash reserves.
“It wasn’t a single huge event, like Katrina,” Avzaradel explains. “The wildfires and typhoons really wiped out a significant amount of capital.” Insurers needed to replenish their reserves so they would be prepared in case of another disaster-laden year.
Other trends have pressured premiums higher. Low yields in fixed income caused many insurers to lean on underwriting. And “social inflation,” or the cost of lawsuits, has been on the rise in recent years, with more class-action lawsuits filed and larger damages awarded by juries.
As a consequence, insurers have been increasing premiums since 2017, reversing a yearslong trend of falling rates. That recapitalization helped put companies in a position to better weather another disaster. When COVID-19 hit, many had already been shoring up their reserves for some time.
Higher rates are a particular boon for brokers, which connect consumers and businesses to insurers and negotiate prices. They get a cut of the premiums but don’t assume the risk of payouts.
“If the pricing dynamics continue, many companies are in a position to generate good underwriting margins for a number of years,” Avzaradel says. “I think that hasn’t been fully reflected in the numbers.”
On the medical insurance side, premium growth hasn’t been as pronounced because insurers haven’t experienced severe losses. Additionally, regulations limiting profit have led to more-predictable premiums in recent years, giving the industry a more-even keel, Frank says.
“Over time, companies are less able to undercut prices to gain members, to only then raise prices later,” she explains. The trend of moderated premium growth could continue into 2021, she adds, because a fee applied to medical insurers in the Patient Protection and Affordable Care Act is scheduled to end in January.
That stability has been bolstered by the government’s willingness to intervene in the case of emergencies, as it did earlier this year when it helped cover costs for some Medicare Advantage plans.
“That’s where you would have expected the biggest losses,” Frank explains. “But the payments were enough to reassure the market, even before utilization rates plummeted.”