Hurricane season has begun and early forecasts call for an active North Atlantic storm season by 2022 with a 76% chance of a major hurricane making landfall on the US mainland, above the multi-year average for the US. 52%, Jefferies analyst Yaron Kinar said in a note to customers.
the university of colorado forecasts that Atlantic hurricanes will be “well above average” this year, with 20 named storms and 10 hurricanes. That’s more than the 1991-2020 average of 14.4 named storms and 7.2 hurricanes. “We anticipate cool, neutral ENSO (El Niño-Southern Oscillation) or small La Niña conditions to predominate in the coming months,” according to CSU Tropical Weather & Climate Research.
Short term trading: Overall, Kinar suggested that buying shares of hurricane-exposed personal lines insurers and insurance brokers for a short-term operation at or near the US landfall of a major storm offers the greatest advantage. 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) the expectation of bullish prices often follows large catastrophic events.
“We expect substantial pricing power to emerge if 2022 turns out to be the sixth straight year of hurricane-related industry material losses, even more so with rebuilding costs significantly higher,” Kinar wrote.
Personal Pricing Power: CFRA analyst Cathy Siefert expects pricing power to pick up in P&C personal lines approaching double digits, especially in personal autos, while commercial lines prices slow. For example, business line rates increased an average of 6.6% in the first quarter of 2022, up from 10% in the first quarter of 2021, she said.
Turning to individual stocks, Kinar de Jefferies notes that Allstate (NYSE: ALL) is more sensitive to catastrophic losses due to a larger book of owners. Meanwhile, Progressive (New York Stock Exchange: PGR), more heavily weighted in the less CAT-prone automotive sector, has less exposure to hurricanes and less subsequent pricing power.
Less leveraged opportunity: “US insurance brokers present a less leveraged post-landing opportunity for more risk-averse investors, benefiting from rising US wind prices on our hedge,” he said.
Brown Brown (NYSE:BRO) is most exposed to US winds, he said, particularly off the Florida coast, followed by AJ Gallagher (New York Stock Exchange: AJG) and Aon Plc (New York Stock Exchange:AON).
CFRA’s Seifert points out that the mix of catastrophic losses is important. If you have a year where losses are primarily due to fire, “insurers end up footing the bill.” In contrast, on a loss-paid-to-total-loss ratio, insurers pay fewer claims during hurricanes, since flood exceptions come into play. So “losses paid in full will be a little bit lower,” he said.
Overall, Seifert is constructive in the P&C and reinsurance space. She likes Allstate (ALL), which is “compelling on restructuring and price gains.” Other selections include Chubb (New York Stock Exchange:CB); IAG (NYSE: AIG); Arch capital (NASDAQ:ACGL) and Everest RE (New York Stock Exchange: RE) on reinsurance; and Markel (New York Stock Exchange: MKL) in the specialty business subsector.
Note that in May, the SA Quant system flagged Brown & Brown (BRO) as high risk of poor performance, based on negative EPS valuation and reviews. To compare ALL key stats with PGR, BRO, AJG, CB and RE, click here.
See the performance of ALL, PGR, BRO, AJG and AON shares over the past five years here. Use the SA Stock Evaluator for Property and Casualty Insurance Investment Ideas
Last year, shares of property and casualty insurers fell in the third quarter as Hurricane Ida took its toll.