In the recent stock market downturn, and the financial sector has been one of the worst performers of all. And insurance stocks were no exception. AnConversely, when the market rebounded on Friday, insurance stocks were some of the best performers. Markel (NYSE:MKL), Aflac (NYSE:AFL), and Safety Insurance Group (NASDAQ:SAFT) ended the day higher up 10%, 10%, and 12%, respectively.
Insurance stocks had been hammered all week in the market downturn. For one, the coronavirus pandemic itself could result in an uptick in insurance claims, especially if it gets significantly worse from here.
Second, it's important to point out that as the stock market climbed on Friday, so did Treasury yields. A primary driver of insurance company profits is investment income -- that is, insurers collect premiums from their customers, and invest that money until it needs to be paid out. Most insurers invest the bulk of their money in high-grade fixed-income investments such as Treasury securities, so lower yields were a big factor in the underperformance of insurance stocks. Since Treasury yields spiked on Friday, it was a welcome sign that the ultra-low yields that we saw earlier in the week could be over.
It remains to be seen how the coronavirus outbreak will play out, and its magnitude will certainly have an effect on the insurance industry. Furthermore, keep your eye on bond yields (the 10-year Treasury is a good benchmark), as higher yields are generally a positive catalyst for insurance company profits.