Amid the carnage in financial stocks, one group has emerged as a relative outperformer: Property-and-casualty insurers.
As a group, S&P 500 P&C insurers—whose business is insuring businesses and individuals against accidents and other risks to themselves and their property, and which includes firms such as Chubb (CB), Travelers (TRV) , Allstate (ALL) and Progressive (PGR) —are down 29% since the start of the year, versus a more than 51% decline for life insurers and 43% decline for banks as of Thursday. This might seem surprising at a time when people and businesses around the globe are facing huge operating risks and health burdens as the result of an outside, unexpected force, the new coronavirus.
But it turns out that insurers have long been crafting policies that have limited exposure to pandemics, having learned from prior episodes such as SARS. For example, event-cancellation insurance often won’t typically include pandemic-induced disruptions. South by Southwest, the canceled Austin, Texas, festival, said its insurance didn’t cover disease-related cancellations. Insurer Hiscox has said that less than 10% of its event customers opted for additional pandemic coverage.
As the strains become increasingly acute, and as political pressure mounts on financial institutions like banks and consumer lenders to provide relief to customers, it is possible that insurers may end up on the hook in more situations than anticipated.
“The longer disruption persists, it is inevitable that (with lawyer involvement) more claims will successfully find their way around policy wording,” Autonomous Research analyst Ryan Tunis wrote in a recent note.
This week, analysts at Credit Suisse are tracking a proposed piece of legislation in New Jersey that would require business-interruption insurance—which typically requires some kind of property damage, one thing the virus is unlikely to cause—to pay out.
The bill hasn’t yet passed, and may not be effective in practice either, 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, P&C 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 P&C underwriters due to lower rates, falling 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 only down 7% this year.
A key thing to watch will be P&C’s pricing upswing, particularly in business insurance. Insurers have many reasons to hold the line, including the pressure of lower rates and possible social inflation, 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’s not much more you can ask for.
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