As the name suggests, the Accident and Health Insurance industry consists of participants providing workers’ compensation insurance largely to employers operating in hazardous industries (construction, trucking, logging and lumber, manufacturing and agriculture, among others) or providing group, individual or voluntary supplemental insurance products. Workers’ compensation is a form of accident insurance paid by employers without affecting employees’ pay. Claims are generally met by insurance companies or state-run workers’ compensation fund.
With the economy strengthening, manufacturing and construction have gathered momentum. According to Bureau of Labor Statistics, both these industries have been increasing job opportunities at a rapid rate at an increasing rate. With more employment avenues within these industries, demand for workers’ compensation insurance should be higher.
Per a report in IBISWorld, industry revenues are estimated to increase through 2022 and given an optimistic employment outlook and rising interest rates, profitability is expected to improve.
However, the rise in medical costs remains a headwind for the workers’ compensation insurance. Mounting medical costs will call for higher premiums. Also with employment steadily increasing and wages improving, claims costs should be also on the rise.
Industry Lags in Terms of Shareholder Returns
Looking at shareholder returns over the past year, it appears that the broader economic recovery wasn’t enough for boosting investors’ confidence in the industry’s growth prospects. The improving rate environment has been favoring accident and health insurers since the Fed started tightening its monetary policy a couple of years back. However, the rate still remains low. Also, rising medical costs and compliance with regulatory requirements remains a challenge.
While the stocks in this industry have gained 5.2%, the Zacks S&P 500 Composite have rallied 15.8% and the Zacks Finance Sector have grown 6.3%.