Many insurers have been paying out claims that exceed the revenue received from premiums for several years now. The gap began to narrow in 2023, but more progress will be needed if insurers are to bolster their margins. Recently, insurance payments have been rising more quickly than inflation and a continuation of that trend could benefit insurers who continue to trade at relatively low multiples, despite broadly outperforming their financial sector peers in 2024.
Underwriters of property and casualty policies have seen particularly strong performance, but health insurers are also seeing positive trends emerge in hospital volumes and government health plans. The large, publicly traded insurers may be positioned particularly well, capitalizing on growth that has seen just six firms usurp nearly a third of all US health spending. Further, the US rate of uninsured adults has been falling for years, providing millions of new customers.
Related ETF: iShares US Insurance ETF (IAK)
Last week, MRP highlighted a sharp uptick in the sums Americans are paying for financial services and insurance premiums. Per the latest personal consumption expenditures (PCE) in this category were up by 4.6% QoQ in the most recent read, the steepest quarterly rise since 2000. This has set the stage for rising revenue among insurers, increases that exceed broader inflation in the US economy. Though premiums have already been rising relatively steeply for some time, it is likely that these payments will need to continue rising to protect insurer margins and offset a jump in claims that pushed many insurers deeply underwater on their policies throughout the past several years.
Per S&P Global Market Intelligence, the combined ratio for the insurance industry’s personal business lines, which include private auto, homeowners and farmowners insurance, was gauged at 106.7%, an improvement from 109.9% in 2022. That means insurers cumulatively paid out $106.70 for every $100.00 in premiums they receive, but an improvement in this ratio means that the financial health of insurers is improving overall. There has been a slate of new “norms” insurers have had to adjust to over the past several years. These changes have typically presented new risk factors that have been disruptive for their business. Insurance providers typically update policies at an infrequent pace, which means they can…
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