Erie Insurance, USAA, and Amica Mutual make their customers happy by boasting the highest claims satisfaction ratings. But how happy are Erie’s, State Farm’s and other insurance companies’ stockholders these days?
Insurance stocks are known for producing excellent long-term returns in all manner of economic climates. But the coronavirus pandemic has impacted everything. It seems as though no person, no business, and no government is immune to its effects.
However, Warren Buffett isn’t worried. And when the “Oracle of Omaha” speaks, investors listen, especially about the insurance industry. Insurance is how the chief executive of Berkshire Hathaway has become one of the richest people in the world.
As he told Berkshire Hathaway Inc. shareholders at a meeting in May, he doesn’t believe the insurance business will be as hard hit as others. Still, nothing has been untouched by the coronavirus, so how are insurance companies faring?
Are their stocks still faring well? Many insurance companies have been providing partial refunds and special payment plans. What have insurance companies been doing, and have the tactics used to help their customers hurt their financial reputations?
Business Predictions in a Pandemic Climate
The coronavirus spread has created a whole new world, and we all — governments, businesses, and healthcare leaders — are learning what to do. The ever-fluctuating mandates, decision delays and funding challenges have thrown each of our lives for a loop, and are resulting in major long-term consequences.
Here’s an overview of some major industries being dramatically affected by the outbreak.
Experts estimate a loss of $120 billion in sales so far. Independent restaurants’ revenue is on average 30 percent lower than last year’s levels. Without some form of additional aid, as many as 85 percent of the independent restaurants in the United States could close by the end of the year.
Even chains are not immune. The Souplantation/Sweet Tomatoes buffet chain has gone completely dark, and household names like McDonald’s, Starbucks, Pizza Hut, Ruby Tuesday, and Steak ‘n Shake have closed a number of their locations.
The “Retail Apocalypse” saw plunges in March and April, then a rise for three straight months, including by 1.2 percent in July. But with uncertainty around job and income prospects, a slowdown looms.
So far, chains that have experienced permanent closures include Pier 1 Imports, New York & Company, AT&T Stores and Cricket Wireless shops. Other chains that are closing stores include GNC, Stein Mart, Bed Bath & Beyond, Victoria’s Secret, Bath & Body Works, CVS, and Bloomingdale’s.
Travel & Hospitality
The United States and Canadian airline industry could lose as much as $21.1 billion in revenue. The hotel industry, the ninth largest sector in the United States in terms of total number of workers, has experienced tens of thousands of layoffs.
Here’s a sobering early statistic. In the first week of March, there was an 11.6% decline in revenue per room available in United States hotels compared to the same week of 2019.
Movie theater closures and delayed blockbuster movies have become “the new norm.” The United States box office revenue for the weekend of March 13-15 came in at just over $54 million, the lowest since September 2000.
Another area that’s suffering is Broadway. New York City’s tourism mecca was shut down in mid-March and is not scheduled to reopen until at least early January. Expected revenue loss is $565 million.
How Insurance Companies Have Reacted to the Coronavirus
The auto insurance industry, for one, quickly adapted to change by trying to treat their customers fairly.
Refunds and Payment Delay
Stay-at-home orders mean shuttered workplaces. Who’s driving? The deserted highways weren’t lost on auto insurance companies, and they acted quickly to provide their customers with a bit of relief when the quarantine hit.
Most insurers implemented policy refunds averaging from fifteen to twenty percent and mostly for multiple months. Some auto insurers also paused late fees and non-pay cutoffs.
Some insurance companies are even accommodating the burgeoning rideshare/food delivery industry by extending personal car insurance coverage for delivery drivers. Those who use their personal car for business use usually have to purchase a commercial auto insurance policy.
Allstate automatically added additional protection for customers delivering medicine, foods, and other goods in a professional capacity if an emergency order is in place where they live.
Nationwide is helping restaurant owners and retailers by providing coverage for those doing business by delivery because of COVID-19 restrictions.
American Family has extended personal auto insurance coverage to drivers delivering essential supplies.
How is coronavirus affecting insurance stocks?
Overall, after peaking at 29,000 in February, the Dow Jones Industrial Average fell below 21,000 by mid-March — a nearly thirty percent drop. On March 16, the Dow fell by nearly 3,000 points, the largest single-day drop in history.
But the pandemic is oddly enough producing a silver lining for insurance companies.
Reduction in Claims
Policy modifications are costing insurance companies billions of dollars. Despite this jaw-dropping price tag, insurers will still likely have record-breaking profits.
Fortunately for them and in turn, for drivers in general, they are dealing with fewer claims. Claims are the primary expense for an insurance company, but since there are fewer cars on the road, there are fewer accidents and therefore fewer insurance payouts.
In fact, there has been a dramatic fall in drunk-driving rates, which account for 40 percent of car accident deaths. California, Texas, Pennsylvania, Florida, and North Carolina are expected to have the most dramatic number of drops.
Insurance Stocks: Big Picture
Many insurers are down thirty percent or more year to date. Insurers typically trade at around 1.2 times book value, but they’ve been knocked down to the 0.8 range. Fears about a spike in claims turned some investors skittish, driving them away from insurance stocks when the coronavirus outbreak started.
But don’t despair. While stock market experts note that insurance stocks are being battered now (thanks to business interruption claims, political pressures, and a prolonged slowdown possibly crippling demand), expect to look forward to long-term outsized profits.
Here is a promising development. Corporate insiders are buying insurance stocks across the board — life insurance and annuity companies, workers’ compensation, home mortgage, and auto.
Uncertain times make people insecure. Insecurity usually breeds the desire for more insurance. So insiders expect insurance pricing to remain strong. They also expect the demand for insurance companies to increase after the COVID-19 outbreak ends.
The pandemic’s disruption has provided a wake-up call, reminding people why it is important to have insurance coverage.
Insiders are also downplaying those who fret that insurance companies will face a wave of lawsuits to pay companies for COVID-19 downtime. Unlikely, they say, as most business interruption policies include exemptions for pandemics, viruses, and bacteria. There is the requirement to show actual physical damage to property to consider.
The stock market experts takeaway? Insurance thrives in a “hard market.” So hang in there, and hang on to your insurance stocks, especially the large and stable insurance company stocks.
Remember, one of the financial mistakes you don’t want to make during the pandemic is selling your stock too soon. Value investors have patience that we will recover. And the market will recover as well.
Karen Condor is a finance expert who writes and researches for the auto insurance comparison site, 4AutoInsuranceQuote.com.