Insurance plays for a busy hurricane season ahead (NYSE:ALL)
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Insurance plays for a busy hurricane season ahead (NYSE:ALL)

Hurricane Ida 2021 Topographic Map 3D Render Color

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Hurricane season has started and early forecasts are calling for an active 2022 North Atlantic storm season with a 76% probability of a major hurricane making continental US landfall, above the 52% multi-year average, said Jefferies analyst Yaron Kinar in a note to clients.

The University of Colorado forecasts that Atlantic hurricanes will be “well above average” this year, wit 20 named storms and 10 hurricanes. That’s up from the 1991-2020 average of 14.4 named storms and 7.2 hurricanes. “We anticipate that either cool neutral ENSO (El Niño-Southern Oscillation) or wee La Niña conditions will predominate over the next several months,” according to CSU Tropical Weather & Climate Research.

Short-term trades: Overall, Kinar suggested that buying shares of hurricane-exposed personal lines insurers and insurance brokers for a short-term trade at or near US landfall of a major storm offer the most upside. He gave two reasons for the strategy: 1) widespread expectations of material losses during storm season often exceed actual losses even in active storm years; and 2) bullish pricing expectation often follow large catastrophic events.

“We expect substantial pricing power to emerge if 2022 proves to be the sixth consecutive year of material hurricane-related industry losses, all the more so with rebuilding costs significantly higher,” Kinar wrote.

Personal pricing power: Cathy Siefert, analyst at CFRA, expects pricing power to pick up in P&C personal lines approaching double digits, especially in personal auto, while commercial lines’ pricing decelerates. For example, commercial line rates increased an average of 6.6% in Q1 2022, down from 10% in Q1 2021, she said.

Looking to individual stocks, Jefferies’ Kinar notes that Allstate (NYSE:ALL) is more sensitive to catastrophic losses due to a larger homeowners’ book. Meanwhile, Progressive (NYSE:PGR), more heavily weighted to the less CAT-prone auto sector, has less hurricane exposure and less subsequent pricing power.

Less leveraged opportunity: “US insurance brokers present a less levered post-landfall opportunity for more risk averse investors, benefiting from increased US wind pricing in our coverage,” he said.

Brown & Brown (NYSE:BRO) is most exposed to US wind events, he said, particularly in coastal Florida, followed by AJ Gallagher (NYSE:AJG) and Aon Plc (NYSE:AON).

CFRA’s Seifert notes that the mix of catastrophic losses is important. If you have a year where losses are mostly from fire events, “insurers end up footing the bill.” By contrast, on a paid-losses-to-total-losses ratio, insurers pay out cover fewer claims during hurricanes, as flood exceptions come into play. So the “paid-to-total losses is going to be a little lower,” she said.

Overall, Seifert is constructive on the P&C insurance and reinsurer space. She likes Allstate (ALL), which is “compelling on restructuring and pricing gains.” Other picks include Chubb (NYSE:CB); AIG (NYSE:AIG); Arch Capital (NASDAQ:ACGL) and Everest RE (NYSE:RE) on reinsurance; and Markel (NYSE:MKL) in the specialty commercial subsector.

Note that in May, the SA Quant system flagged Brown & Brown (BRO) for a high risk of performing poorly, based on valuation and negative EPS revisions. To compare ALL key stats with PGR, BRO, AJG, CB, and RE, click here.

See the stock performance of ALL, PGR, BRO, AJG and AON over the past five years here. Use the SA stock screener, for investment ideas in the P&C Insurance

Last year, P&C insurer stocks slipped in Q3 as Hurricane Ida took its toll

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