Since the beginning of 2022, the stock market has posted lackluster results, with the S&P 500 down 15% while the tech-heavy Nasdaq Composite index lost 26%. Despite this, Reinsurance Group of America(NYSE: RGA) has held up quite well, with the stock gaining 33% during the same period.
Insurance companies have generally outperformed this past year because of their ability to adjust to inflation and take advantage of rising interest rates. Reinsurance Group of America has benefited from other tailwinds, too, including falling costs from pandemic-related claims. Here's why the stock is beating the bear market -- and a look at whether the outperformance can continue.
An insurer for other insurance companies
Reinsurance Group of America provides reinsurance coverage for life and health insurers globally. Reinsurance is insurance bought by insurers that can protect them from experiencing catastrophic losses from unexpected events. Insurers use it to cap the downside risk on their policies in the event of an extreme event. Reinsurance can be lucrative because insurers rarely see losses balloon to such extreme levels.
Reinsurance Group of America makes money in two different ways. It collects premiums from insurance companies, intending to bring in more premiums than it pays out in insurance claims. The best insurers can consistently take in more premiums than claims (otherwise, they would no longer be in business). It also makes money by investing its funds in bonds or stocks, which can produce income from interest and investment returns.
The pandemic brought tough times on life insurers
Companies in the life insurance industry have had a wild ride over the past few years. When the COVID-19 pandemic emerged in early 2020, it was the first global pandemic in more than a century -- an unexpected event, to say the least. What resulted was a challenging environment for life insurance companies, which faced soaring claims payouts.
According to data from the American Council of Life Insurers, U.S. life insurers paid out $90 billion to beneficiaries in 2020, a 15.4% increase from the previous year. This was the largest year-over-year increase since the 1918 influenza pandemic. The next year wasn't much better as payouts increased another 11% to $100 billion.
From late February 2020 to its low a month later, Reinsurance Group of America plummeted 63%. It bounced back, but the stock still hasn't returned to its pre-pandemic price.
Things are looking up for the insurer
The situation has drastically improved for Reinsurance Group of America. In the third quarter, its claims and other benefits expense fell 14.4% from the prior-year period. In the U.S., claims costs of $45 million were on the low end of its estimates.
It also reported $34 million in claims costs in Japan, where this expense is higher because of the industry practice of covering at-home care related to COVID-19. Japan had rules for "deemed hospitalization," which allowed for the payment of claims outside the care of a hospital. However, the Japanese government is narrowing the scope of this definition, given lower hospitalization rates and less severe infections -- which should lead to fewer claims from that region.
Reinsurers Group of America should benefit from higher interest rates, too
Higher interest rates have hurt many companies because they increase borrowing costs and have an adverse effect on asset prices because of the discounting of cash flows.
However, insurance companies welcome higher interest rates. That's because they invest their funds in bonds and other assets at those higher rates. In the third quarter, Reinsurance Group of America's new money rate, or the rate it can invest its current cash flows, rose to 5.35% -- above its current portfolio yield of 4.4%. These higher rates should boost its investment income.
Reinsurance Group of America has done well, as have most insurance companies this past year, because of its ability to adjust its premiums in response to inflation and take advantage of higher interest rates. The stock should continue to do well as claims costs keep falling.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
