Insurance stocks once provided a reliable haven to investors in times of market volatility. That stable quality has largely evaporated in recent years, but property and casualty shares remain a relative beacon of safety.
During the turbulence that has rocked U.S. equities in recent weeks, for instance, an index of P&C stocks created by Keefe Bruyette & Woods and tracked by an Invesco ETF generally stayed above the S&P 500 Index as it surged up and down. A broader index that includes life insurers and brokers as well as P&C stocks underperformed the KBW-based ETF.
"If we go back to the early 1990s, 1980s and preceding decades, insurance stocks were generally viewed as a steady, solid investment even during times of economic uncertainty," said former Insurance Information Institute President Robert Hartwig, now director of the Center for Risk and Uncertainty Management at the University of South Carolina's Darla Moore School of Business. "Holding insurance stocks was often likened to holding utility stocks."
Highly regulated rates accounted for much of that stability, Hartwig said, but over the decades that followed, insurance regulation decreased. "As a consequence, the dynamics of insurance pricing changed," Hartwig said.
The relative stability of the sector began to erode around the start of the century, then briefly returned at the end of the 2007-2009 financial crisis before volatility resumed. Much of that evolution has stemmed from a drop in long-term interest rates to historically low levels, first in 2002 and then again at the end of the crisis when they fell to near-zero levels.
As regulations fell away, disclosure requirements increased, giving investors more clarity, KBW analyst Meyer Shields said. That led to more volatility in some insurers' stocks, since enhanced insight into their investment portfolios showed that for many, their holdings had become more risky.
"Over the last 15 years, P&C insurers have increased the percentage of their invested assets in equities (mostly common stock) from about 13% to about 23% and reduced the percentage in bonds from about 74% to about 64%," said Insurance Information Institute chief economist Steven Weisbart. "So the investment portion of P&C insurer operations — normally the steady component of insurer profits — has become slightly more volatile."
Interest rates near zero since 2008 also propelled life insurers to invest more heavily in riskier assets, such as equities, and alternatives, including real estate and hedge funds.
Today, analysts say life stocks in particular tend to be just as volatile as the overall market, if not more so.
"We didn't really worry about credit before 2008," said B. Riley FBR insurance analyst Randy Binner regarding how investors value stocks of life insurers. Now, however, big life insurers MetLife Inc. and Prudential Financial Inc. have beta values of 1.29 and 1.38, respectively (a beta of 1.0 mirrors the market, while a reading of more than 1 indicates greater volatility and less than 1 represents more stability.)
"When the market wants to go risk off, they lead with MetLife, Prudential and Lincoln Financial," Binner said.
But P&C shares, where underwriting results can buffer the effects of macroeconomic forces, remain less volatile than markets generally.
Although multiline carrier American International Group Inc. has a beta of 0.99, P&C giants Travelers Cos. Inc. and Chubb Ltd. both sport betas of 0.78 and W. R. Berkley Corp. comes in at 0.71. For perspective, New York electricity provider Consolidated Edison Inc.s beta is 0.25 and Atlanta-based utility Southern Co. is just above that at 0.27.
"P&C stocks initially also see volatility compared to other segments of the market" when shares begin to swing, said Buckingham Research analyst Amit Kumar. “But once the dust settles, they start moving in their own cycle."
As for what to expect as the coming year unfolds, KBW's Shields said: "Definitely more of the same."