Forecasters expect another devastating hurricane season this year. Colorado State University’s Department of Atmospheric Science warned that a “very active” season could bring 11 hurricanes, including five “major” hurricanes (Categories 3 to 5) and 23 named storms, compared with the 1990-2020 season. The average number of hurricanes is 14.4.
For most insurers, it’s a nightmare prospect that will cause costs to skyrocket as catastrophic claims surge, but for some the carnage may instead present an opportunity.
“If this grim forecast materializes, it could boost pricing for many property casualty insurance and reinsurance lines, providing some carriers with a stocks provide catalysts.
Seifert described how some insurance providers and brokers not severely exposed to hurricane-related disaster claims have benefited from the industry’s strong pricing environment. Due to increasing catastrophe losses, many insurance companies are increasing premiums by 10% to 25% (“or more”) every year.
Seifert explained that in recent years, hurricanes, wildfires, floods and unpredictable non-hurricane “supercell” storms have caused increasing damage to property. “The risk of hurricanes and coastal flooding, once considered a ‘Florida problem,’ has greatly expanded,” she added, noting that nearly 7.6 million households are now vulnerable to the storm surge of a Category 4 hurricane.
The Pew Research Center found that, in her opinion, hurricane frequency and losses have soared over the past two decades. Between 1983 and 2002, there were 96 major hurricanes, causing $546.3 billion in damage, but between 2003 and 2022, there were 244 similar disasters, causing more than $1.95 trillion in damage.
Despite an increase in catastrophic property losses and a grim outlook for that trend to continue, property and casualty insurers have performed quite well this year. The S&P 500 Property Casualty Sub-Industry Index is up more than 17% so far this year, outperforming the broader blue-chip index which is up about 15% during the same period. Seifert foresees better times ahead for some of these insurance providers.
The analyst highlighted five insurers that are “well-positioned to benefit from potentially sustained industry-wide pricing power or other company-specific catalysts while maintaining manageable levels of exposure to catastrophes.” But she cautioned investors to remain cautious. Be cautious when picking insurance stocks, as hurricane season can be “devastating and volatile” for some home and commercial property insurance companies.
American International Group (AIG)
Insurance giant AIG is best known for its woes during the global financial crisis, but the company has transformed over the past 15 years. Seifert noted that the new AIG is a “more focused” property-casualty insurer that has been separated from its life insurance and retirement businesses.
The analyst went on to argue that AIG will benefit from rising insurance premiums and investment income, especially after redesigning its property casualty book to “lower its risk profile and reduce catastrophe exposure.”
CFRA has a “buy” rating on AIG stock and a 12-month price target of $90, which represents a potential return for investors of 20%.
Gongfeng Capital Group
Arch Capital Group, which provides insurance and reinsurance (think: insuring insurance companies), was founded after the Sept. 11 terrorist attacks, when insurance was difficult to obtain. Today, the company offers products ranging from property casualty insurance to professional liability insurance and is known for its flexible business model, which allows it to pivot into the most profitable areas of insurance.
“We expect Arch to take advantage of favorable market and pricing conditions to achieve operating income growth of more than 20% in 2024 and approximately 15%-20% in 2025, approximately the growth rate of the broader insurance and reinsurance industry,” Seifert wrote. twice.
CFRA gives Arch Capital Group stock a “buy” rating and a 12-month price target of $107, giving investors a potential return of 7%.
Arthur J. Gallagher (AJG) is a leading commercial insurance brokerage and risk management firm that has grown rapidly through acquisitions for decades. The company generates 87% of its revenue from its wholesale and retail insurance brokerage business, which has benefited from rising insurance premiums and brokerage commissions.
CFRA expects AJG’s organic revenue to grow 7% to 10% in 2024 and 2025, noting that the company acquired 50 companies in 2023 that contributed $826 million in revenue. “If pricing trends hold and AJG’s acquisition strategy continues as planned, revenue growth in 2024 and 2025 could exceed our forecasts,” Seifert wrote.
CFRA has a “buy” rating and a $272 12-month price target on Arthur J. Gallagher & Co.’s stock, implying a potential return of 7% for investors.
Berkshire Hathaway
Warren Buffett’s giant conglomerate Berkshire Hathaway may also benefit from rising insurance premiums. Berkshire owns Geico, a leading auto insurance company, and provides reinsurance through its subsidiaries General Re Corp. and National Indemnity Co. , expanded its business in the insurance field.
“Primarily driven by accelerated reinsurance revenue growth, we expect overall Berkshire Hathaway operating income to grow 10% to 15% in 2024 and 12% to 15% in 2025,” Seifert wrote. Growth. “These growth forecasts exclude the impact of any acquisitions, which we believe remain central to Berkshire’s overall strategy. “
CFRA has a “buy” rating on AIG stock and a 12-month price target of $472, which represents a potential return for investors of 15%.
The Progressive Corporation is one of the world’s largest insurance companies, with $62 billion in written premiums. The company is focused on auto insurance, and Seifert believes rising premiums coupled with falling claims should boost its profitability as the post-pandemic driving surge slows.
Seifert also highlighted Progressive’s usage-based insurance product called Snapshot, labeling it an “industry-leading product” that expands the company’s competitive advantage over peers.
“We forecast operating income growth of 15%-20% in 2024, which reflects our view that net premiums will grow by 15% to 20%, net investment income will grow by at least 10%, and fee income will grow by 15% – 18%,” she added, noting that “these growth rates are almost double the industry average.
CFRA has a “buy” rating on AIG stock and a 12-month price target of $235, which implies a potential return for investors of 14%.
