Insurance stocks had a torrid time at the onset of COVID-19. Low interest rates and fixed-income investment affected life and health stocks severely, but after a sizzling 2021 Q2 in equity markets, there is a bright light at the end of the tunnel.
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How has the pandemic affected insurance stocks and how is it panning out for the remainder of 2021?
Insurance Stocks in Covid Times
By mid-July 2020, many insurers were down 30% or more YTD. According to MarketWatch, insurers usually trade at nearly 1.2 times book value, but they came crashing down to the 0.8 range.
“The relative performance of Berkshire Hathaway Inc (NYSE:BRK.A) to the S&P 500 is around a 19-year low.”
In North America, operating return-on-average equity of P&C insurers fell to 2.8% from 8.3% in 2020 H1. This was “in large part due to $6.8 billion in incurred losses related to COVID-19 and concurrent drops in premium volume for key lines,” as per a Deloitte analysis.
“Overall, the year-to-date total return of S&P’s Insurance Industry Index lagged the broader S&P 500 by 24.6% as of September 30, 2020.”
By the end of 2020, insurance stocks were facing asset risk, capital markets volatility, and faint premium growth forecasts. A feeble investment ecosystem –caused by low interest rates and volatile equity markets– quelled investment performance, while anxiety over macroeconomic KPIs affected the market’s growth prospects.
Further, according to S&P Global, the litigious nature of the U.S.’s legal system resulted in random claims settlements, linked to reserve volatility stemming from spikes in claims severity or frequency.
With so many partner firms making it easy for the public to claim against insurers, questions remain as to how resilient the industry can be in an insurance claim landscape that is constantly redefined by the courts.
A New Market
The uncertainty during Covid times has prompted customers to acquire more insurance, as “People value insurance after they feel a loss,” according to T. Rowe Price’s Greg Locraft.
“They are going to buy more insurance, and pay more for it,” creating a “hard market” with favorable pricing trends for insurers.
“You have classic hard market emerging in property and casualty insurance, and it is the first hard market since 2001 … That is why insurance insiders are buying. They know it. They see it. And they’re buying it.”
According to Axis Capital Holdings AXS CEO, Albert Benchimol, “We expect that market pricing will continue to remain strong, to allow the industry to absorb the higher losses that are expected to emerge from this pandemic.”
Meanwhile, investors aiming at insurance stocks have been concerned about a lengthy fragile demand for insurance and sustained low returns on investments, given the low bond yields during Covid times.
Light at The End of The Tunnel
However –despite fears over the Delta variant– life and P&C insurers are growing more enthusiastic as the vaccine rolls out across the globe and restrictions are lifted. Also, because equity markets ended the first half of 2021 at record highs.
“The outlook for both life and property and casualty (P&C) stocks is brighter for 2021, thanks to economic recovery and increased availability of vaccines,” says S&P Global.
In early July, the S&P 500 grew by 1.67% hitting a record of 4,352.42, as the SNL U.S. Insurance Index went up by 0.16% to 1,397.42.
While insurance companies overcome the sales hurdles and the interest rate recovers, analysts see H2 as the start of a juicy post-pandemic future.
“We’re coming to what appears to be some of the light at the end of the tunnel,” said CreditSights analysts Josh Esterov and Connor Burnham.
“The uptick in employment is favorable for group life insurance accounts [and] it's favorable for certain P&C lines of business in terms of premium development.”
In this context, competition among life insurance companies is bound to warm up as some insurers will fiercely want to convert on their sales targets after the dark period. Also, P&C firms could start looking at spreading into other segments.
Stocks
Heading into the second half of 2021, and despite some mixed performances in early July, investors are looking to buy insurance stocks before the interest rate increases.
Some big names are part of the hottest mix, especially those selling products that guarantee a set return, such as Chubb Ltd (NYSE:CB), Marsh & McLennan Companies Inc (NYSE:MMC), Aon PLC (NYSE:AON), and MetLife Inc (NYSE:MET).
According to CFRA analyst Catherine Seifert, Chubb’s positive pricing momentum in recent quarters and the slowing number of claims set the P&C giant in prime position.
The research firm states that Chubb is forecast for a 6% to 10% net premium growth this and next year, with $11.35 in 2021 earnings per share –a 16.9% increase from 2019.
Also, despite an antitrust lawsuit for the acquisition of Willis Tower Watson PLC (NASDAQ:WLTW), Aon will likely benefit from a favorable insurance pricing environment.
As for MetLife, the life insurance giant is set for an operating revenue growth of 6% in 2021 and 5% in 2022. “A recovering U.S. labor market should catalyze group life sales,” and the growing demand for pension risk transfer products “should boost retirement products earnings growth.”
