As I write this article, it is still too early to know how bad the new coronavirus (2019-nCoV) is going to be. Hopefully, we will contain it, and the mortality rate will be low. However, just in case it does become widespread, it is important for us to be aware of the risks to our investments and take precautions to protect them. While I am not recommending any specific actions, here are some areas that could be particularly affected by this virus.
Exposure to China
Companies exposed to China will definitely be affected by this virus, and most are already seeing that in their share prices. As people stay home to protect themselves from the virus, they will not be going to work or spending as much money on activities like shopping, dining out, entertainment, and gaming. For manufacturers in China, people not going to work could mean supply chain issues. For consumer-facing companies, people not getting out of the house will mean missed sales. Some of these may just be delayed until a later quarter, but others, like restaurant sales, will probably be lost.
Additionally, travel and hospitality companies like hotels, airlines, and cruise lines will be affected. Some airlines have canceled flights to and from China for the next couple of months at least.
If the virus continues to spread beyond China, the companies above will continue to be hurt along with other companies in their industries who didn't have the initial China exposure. Generally speaking, the economy will be hurt wherever this virus goes.
An industry at particular risk
Most of the time, insurance works behind the scenes. You have it, but you don't think much about it. As long as your provider pays when it should, all is good. As a result, most probably haven't thought about the significant losses that the insurance industry could suffer if the coronavirus spreads.
Insurance spreads risks of something bad happening out across a group of policyholders. It uses statistics to determine the chances and cost of an event happening and charges premiums to the group accordingly. As long as its numbers are correct, there should be a pool of money available to cover damages whenever an insured event happens.
The problem comes up when the numbers are wrong and something unexpected happens. Insurance companies can handle occasional events affecting a few group members, but when the whole group suffers from an event at once, there may not be enough money to cover everyone. Usually this is a risk for property and casualty insurance companies, who have trouble when natural disasters are worse or more frequent than expected. On these occasions, the value of the claims being filed by policyholders is greater than expected, and the pool may not be big enough to cover the costs.
In this case, health, life, and reinsurance companies are the ones at risk. If the virus spreads, causing millions of people to seek medical attention, health insurance companies will receive a flood of claims that they will have to pay out. Life insurance companies could be affected if there are many fatalities. And lastly, reinsurance companies, which provide insurance for the insurance companies, may have their own issues with greater-than-expected claims.
Examples of companies that could be affected are Anthem (ELV 1.57%), Cigna (CI), and UnitedHealth Group (UNH 1.68%) in the health insurance area, AFLAC (AFL 0.78%), MetLife (MET 0.53%), and Prudential Financial (PRU 0.74%) for life insurance, and Reinsurance Group of America (RGA 1.52%) for reinsurance.
Some companies could see demand increase
Not every company will be hurt by this virus. The most obvious example of a potential winner is the company that comes up with a vaccine for the virus. Several biotech companies are already working on it.
Hospitals, like HCA Healthcare (HCA -0.35%), Tenet Healthcare (THC -2.05%), and Universal Health Services (UHS -0.43%), are likely to see greater demand. If the virus does spread throughout the US, hospitals will receive a rush of patients. This should boost revenues, but actual payments could be another matter. I expect the bills of most patients with insurance to be at least partially paid, but it might be harder to collect on those without insurance. Whatever the case, we probably won't know about the payment side for a few months.
In The End...
Just as the virus will come and go, so will the effects on most businesses. Assuming the virus does not end up being too severe, any gains or losses that companies, including insurance providers, see will likely be transitory. An investor with a long time horizon will probably be fine just riding out whatever happens. But if you're an active investor or have a shorter time horizon, it is a good idea to prepare yourself. Understand the risks in your portfolio so you are ready to act if necessary.