Thanks to Afshin Sayani, Chartered Financial Analyst, and Matt Burton, of BVA Group LLC, for their help authoring this article.
In 2021, the insurance industry continued to recover from the initial wake of COVID-19 and benefited from the easing of pandemic-related restrictions and increased economic growth. In the first half of 2021, the S&P Insurance Industry Index (ticker INDEXSP:SPSIINS) exceeded the S&P 500 index by an average of 2.24 percent. However, in the second half of 2021, the S&P Insurance Industry Index lagged behind the S&P 500 index by an average of 4.8 percent.
As shown in the chart below, after modest outperformance during the first half of the year, the insurance industry's growth slowed in the latter half of 2021 when compared to the broader market.
Data Provided by CapitalIQ
The focus of this article revolves around the key drivers in each of the subcategories in the insurance industry and how the COVID-19 pandemic impacted these areas of the economy in 2021.
Throughout 2021, consumer risk awareness remained elevated due to the lingering effects of the pandemic and the emergence of COVID-19 variants such as Delta and Omicron. Subsequently, demand across the life insurance sector was strong in 2021. As a reflection of the increased demand, individually underwritten life insurance applications at the end of 2021 were up 3.4 percent year-over-year. 1 However, low interest rates and rising inflation depressed portfolio returns across the board. Additionally, the sector continued to experience new challenges, including heightened competition, technological acceleration, and regulatory shifts. 2
As a reflection of increased demand, the average market capitalization of publicly traded life and health insurance companies in the United States initially increased and then stabilized in the second half of 2021, as shown in the illustration below.
Enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples increased in the first half of 2021 but then contracted in the second half of 2021 as optimism for further growth in the sector faded, following a similar pattern to the average market capitalization of companies within the sector.
In 2021, property insurers continued to benefit from market recovery as the economy rebounded from COVID-19. However, market conditions remained volatile for geographically challenged areas, including hurricane-prone southern coastal regions and wildfire zones on the West Coast. Regions that were impacted by natural disasters in 2021 experienced unpredictable rate and deductible increases due to catastrophe-related losses. On the contrary, lower hazard regions and the diminishing impact of COVID-19 provided opportunities for profitability. 3 Insured property losses from natural disasters amounted to $40 billion in the first half of 2021, well above the historical 10-year average of $33 billion. 4 Additionally, Hurricane Ida created insured losses estimated between $31 billion and $44 billion in the second half of 2021, 5 which would make the magnitude of the insured loss comparable to storms such as Hurricane Harvey in 2017 and Hurricane Sandy in 2012. 6
While 2021 was a challenging year for the property and casualty (P&C) industry overall, reinsurance net premiums in the sector were up 18.5 percent in the first half of 2021, along with rate increases primarily in commercial property, commercial auto, and business owner policies. 7 Accordingly, the average market capitalization of P&C firms in the United States initially increased before trending downward during hurricane season as losses from natural disasters mounted. Average enterprise value to EBITDA multiples initially declined in the first quarter of 2021; however, enterprise value to EBITDA multiples stabilized thereafter to remain largely unchanged for the rest of the year.
Due to the correlation with the life and health and P&C markets, multiline insurers experienced similar opportunities and challenges across the insurance spectrum. International multiline insurers such as Allianz, AXA, and The Hartford generally noted an increase in revenue and profitability compared to 2020 results. 8 The Hartford reported 2021 core earnings of $2.2 billion, an increase of 4.0 percent from 2020, primarily driven by net investment income and P&C underlying underwriting gain. 9 The Hartford's 2022 growth guidance for its commercial and personal lines was relatively flat compared to 2021 guidance, an indicator that management expects COVID-19-related rebound growth for the sector to subside. 10 Accordingly, US-based multiline insurers saw a significant increase in the sector's average market capitalization, while multiples of enterprise value to EBITDA declined in the latter half of 2021.
Marsh and McLennan, one of the largest insurance brokerage firms in the world, reported an adjusted operating income growth of 18.0 percent in 2021, 11 while Aon PLC also reported operating income growth of 18.0 percent. 12 Supported by digital technology investments, economic recovery following lockdowns early in the pandemic, and increased consumer risk awareness, the brokerage sector's 2021 performance was strong. 13 Brokerage firms performed well in 2020 during the height of the COVID-19 pandemic, and they continued to perform well in 2021. Accordingly, throughout 2021, the brokerage sector average market capitalization increased significantly while enterprise value to EBITDA multiples increased as well.
At the end of 2020, Moody's Investors Service indicated that the outlook for the global reinsurance sector was negative going into 2021. 14 However, Moody's revised the reinsurance outlook from negative to stable in the third quarter of 2021, citing price increases and postpandemic economic recovery. 15 Additionally, dedicated reinsurance capital at year-end 2021 increased 2.8 percent to $534 billion from 2020. Highlighting the positive trend, the weighted average-combined ratio, a measure of an insurance company's profitability in terms of the ratio of total costs divided by total revenue, for the Guy Carpenter Reinsurance Composite improved to 98.7 percent at the end of the third quarter of 2021, compared to 103.4 percent at the end of 2020. 16
The average market capitalization for the reinsurance sector was volatile during 2021. At the beginning of 2021, the average market capitalization sharply declined as the market reacted to the negative outlook announcement from Moody's. Enterprise value to EBITDA multiples for the sector also decreased in response to the negative outlook announcement. Although the negative outlook changed to a stable outlook in the third quarter of 2021, the sector's market capitalization remained volatile while the enterprise value to EBITDA multiples recovered gradually after declining in the first half of 2021.
In 2021, there were 418 transactions globally in the insurance sector, representing an increase compared to the 407 transactions in 2020. The United States continued to be the most active market for merger and acquisition activity, with total transactions increasing by 16.7 percent to 224 in 2021. A strong driver for transaction activity was the desire for increased digitization via InsurTech, as insurers developed new business models and avenues for growth. 17
Notable transactions included the acquisition of Prudential's full-service retirement business for $3.6 billion by Empower, a subsidiary of Great-West Life & Annuity Insurance Company, to reinforce Empower's position as a leader in the US retirement market. 18 Additionally, Cigna and Chubb announced a definitive agreement where Chubb purchased Cigna's accident and supplemental benefits business in the Asia Pacific region for $5.75 billion to further balance Chubb's global portfolio. 19 Also, private equity investment in the space included the merger between Apollo Global Management and Athene, worth $11 billion in an all-stock deal, and Blackstone's $2.8 billion acquisition of Allstate Life Insurance Company. 20
While the focus of this article has been a review of the insurance industry in 2021, we would be remiss if we did not mention Russia's invasion of Ukraine and its potential impacts on the insurance industry. According to A.M. Best, US insurers may face significant indirect exposure due to investments in companies that derive a share of their earnings from Russia. 21 Further, sanctions may impact the ability of international insurers and reinsurers to underwrite Russian risks or make it more difficult for them to service claims on existing policies. The invasion is expected to have a negative impact on stock markets worldwide 22 and may exacerbate already elevated levels of inflation and supply chain disruptions. As of the writing of this article, the war is well into its second month, and a quick resolution to the conflict appears unlikely, suggesting continued market volatility ahead.
Overall, the insurance industry performed well in 2021 despite the lingering effects of COVID-19. Market capitalizations generally have increased across the industry, albeit lagging behind the S&P 500 index, indicating that companies are learning to adapt and grow with the changing economic landscape.
Although most sectors of the insurance industry continued to rebound in 2021, the stagnation of the S&P Insurance Industry Index in the second half of 2021 may suggest that industry rebound growth as a result of COVID-19 will slow down. In the near to midterm, Russia's invasion of Ukraine is expected to drive significant volatility in the markets, and insurers with significant exposure to companies with interests in Russia will be the hardest hit.
Looking forward, insurers were optimistic for economic expansion coupled with significant digital investments to drive growth and engagement in the sector. 23 However, recent accelerating inflation and the accompanying tightening monetary policy have tempered overall economic growth expectations and increased uncertainty. Furthermore, the industry will likely face headwinds as direct and indirect losses from the war in Ukraine, already estimated during the first month of the war at $560.0 billion, 24 begin to ripple throughout the global insurance market. 25
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