Financial markets have given investors several scares and head fakes this summer, but one group is emerging as a winner with a balance of fundamental improvement in its business and defensive qualities — insurance stocks. The iShares U.S. Insurance ETF (IAK) has gained 8.2% in the third quarter, compared to 2.4% for the S & P 500. The sector is beating the broader market on a year-to-date basis as well. IAK 3M mountain Insurance stocks are outperforming in the third quarter. Insurance companies have seen their profit outlook normalize — and even improve — as the effect of the Covid-19 pandemic fades. That strength looks especially attractive compared to signs of economic slowdown elsewhere. Insurance providers are benefiting from “a pretty good operating environment plus a relative safe haven for folks concerned about other parts of the financial services sector,” said Paul Newsome, an analyst at Piper Sandler who covers property and casualty insurers. Andrew Smith, chief investment strategist at Delos Capital Advisors in Dallas, said he has been adding the IAK insurance exchange-traded fund to his clients’ portfolios as a defensive hedge against the market. “Insurance almost to us trades like a utility,” Smith said, in that customers are sticky — reluctant or unable to change providers. Pandemic-era struggles This rally for insurance stocks comes after they struggled in the immediate post-pandemic era. Inflation hurt property insurers, particularly auto insurers, because the price of vehicle repairs and replacements surged. “They were losing money left and right when we had the huge auto inflation, post-pandemic,” said Kevin Heal, an insurance industry analyst at Argus. Now, the rise in auto prices has cooled and insurance premiums have caught up, squeezing consumers but helping the companies. The rise in premiums has not been the same in every state or at every company. Newsome pointed to Progressive as a company that got “in front of” some of the problems that caused big price increases for auto insurance, putting it in a better position to grow now. That stock is up nearly 50% year to date and is well liked by Wall Street analysts. The period of rising costs put an emphasis on efficiency, which helped the larger insurance companies because they have more money to invest in technology, such as drones, Heal said. “The technology’s made it much easier for them to detect fraud,” Heal said. Due to the size benefit, Argus likes multiline insurers including Travelers and Chubb , which recently saw an investment from Warren Buffett ‘s Berkshire Hathaway . The IAK ETF, which holds proportionally more of the larger insurers, has outperformed the more diversified SPDR S & P Insurance ETF (KIE) year to date, though the KIE is ahead in the third quarter. Combined, Progressive and Chubb account for roughly 28% of the IAK, while no one stock in the KIE currently has a weighting above 3%. Lingering issues There are some types of insurance that are on less sure footing. For example, the casualty coverage for commercial insurance has seen rising legal costs in what is sometimes called “social inflation.” New Jersey-based Selective Insurance reported a $176 million charge for its casualty business in the second quarter, pushing its combined ratio above 100%, a key profitability threshold that insurers want to stay below. “Casualty is one of these businesses that is very predictable until they’re not,” Newsome said. “You can build up a big deficit in your reserves because there’s a lot of judgement that goes into setting those reserves. But on a quarter by quarter basis, your results typically are pretty predictable.” This rising risk for casualty insurance makes personal insurance and even property insurance — despite weather-related costs — relatively more attractive, Newsome said. Life insurance companies may be another area of underperformance, as they could see corporate life insurance policies decline in a recession, Heal said. Those business lines may also be sitting on some unrealized losses from long-term bonds that fell in value as the Federal Reserve hiked rates. Insurance companies are somewhat hemmed in by politicians and regulators. Every state has an insurance commissioner heading an office charged with regulating insurance in that state. If it becomes harder to raise insurance premiums, companies will have to decide whether they want to sell potentially riskier policies or see slower growth. “For the most part, if they can’t get their rate increases, they just won’t write new policies,” Heal said.
Alice J. Roden started working for Trending Insurance News at the end of 2021. Alice grew up in Salt Lake City, UT. A writer with a vast insurance industry background Alice has help with several of the biggest insurance companies. Before joining Trending Insurance News, Alice briefly worked as a freelance journalist for several radio stations. She covers home, renters and other property insurance stories.