Insurance companies will provide a clearer picture as to how much of an effect the ongoing COVID-19 pandemic has had on their operations when they report second-quarter earnings.
Managed care companies may actually report some pretty solid results, according to Moody's analyst Dean Ungar, who said the industry could experience "one of the best quarters that you'll ever see" thanks to lower medical expenses. Deferred nonessential procedures drove down expenses as costs connected to COVID-19 treatments increased.
"Even though we know [the pandemic] has been a terrible thing, the numbers and costs, so far, have been offset by the savings from the low utilization of other things," Ungar said in an interview.
Keefe Bruyette & Woods analyst Meyer Shields said the property and casualty companies he covers will be cautious even as the worst-case scenarios some were projecting for the second quarter failed to materialize. The current spike in cases seems to be disproportionately affecting younger people, who are not as vulnerable to the illness, and the overall fatality rate is not as severe as some predicted.
"I think people were completely right in that we were and are in uncharted territory, but now we have more information on the potential outcome," Shields said in an interview. "I don't want to rule it out, but with the overall expectations, I think is not as painful as it could have been."
The same could be said of life insurers, according to Wells Fargo analyst Elyse Greenspan, who said in a note that her estimates "broadly move up as stronger equity markets more than offset the impact of greater COVID-19 related mortality losses."
Managed care benefiting from deferred procedures
Among the reasons Moody's Ungar cites for his positive outlook for managed care companies is UnitedHealth Group Inc. and Anthem Inc. issuing premium credits to their customers. UnitedHealth's $1.5 billion initiative included credits applied to June premium billings received by commercial fully insured customers, while Anthem announced a $2.5 billion program containing one-month premium credits to members enrolled in select individual plans and fully insured employer customers.
Ungar said companies do not initiate such programs if they are concerned about finances. Right now, they want to make sure it does not appear that they are making "too much money" as a result of the pandemic.
"The coronavirus is not an upheaval the insurance companies want to be seen as profiting from," he said.
Global Atlantic sale may indicate healthy life sector
Wells Fargo's Greenspan plans to watch for changes life insurers will make to their outlooks due to the COVID-19-related deaths in the quarter, as well as their thoughts on credit, M&A and pension risk transfer activity, annuity flows and the outlook for capital returns.
Reserving also will be an issue to monitor, said CFRA Research analyst Cathy Seifert. While the second quarter is usually not a big reserving period, unlike the third and fourth quarters, there are some companies that may have to add to reserves.
"I think people are going to want an indication of the adequacy of loss reserves for long-tail risks, particularly in this interest rate environment," Seifert said in an interview. She said investors also will want to hear about the demand for savings and retirement products given the weakness of the labor market.
An indicator of the overall health of the sector may have come from KKR & Co. Inc.'s pending acquisition of retirement and life insurer Global Atlantic Financial Group Ltd.
Piper Sandler analyst John Barnidge said in a note that the transaction is "likely emblematic of a quelling of concern over the credit environment." He said strong monetary support from the Federal Reserve and COVID-19-related fiscal policy from the U.S. Treasury helped to calm those worries.
Barnidge also suggested there is "a robust block M&A market available" despite the extended low interest rate environment, an opinion with which CFRA's Seifert concurs.
"While low interest rates certainly hurt the group, I'm thinking there are some opportunistic buyers out there who are finding some attractive values in the life space, and you may see increased consolidation there," Seifert said.
Worst case avoided, but P&C sector still wary
KBW's Shields said he expects the prime topic for discussion on P&C calls is the "significant and increasing momentum" for rate increases. Some of that discussion will center around specialty commercial and excess and surplus lines.
Other topics he expects to be covered include the current economic outlook and reports that the worst-case scenario is not likely to materialize, and about unusual losses companies have been dealing with, "whether that's business interruption, overall COVID provisions or what it means for workers compensation."
Shields said some of the business interruption claims will be in litigation for "a couple of years," so there will be no finality on loss estimates in the near future. However, in some cases where the investor outlook is "particularly pessimistic," things should work out well.
"I'm not particularly worried about the losses likely to be reported in the second quarter," Shields said, "But I don't know that we've had that much more information or certainty about where that particular issue ends up. I think it's still early."