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Investors Like Hiked Insurance Premiums

Policyholders are paying the price for low Treasury yields

   

“Change occurs in direct proportion to dissatisfaction, but dissatisfaction never changes.” — Douglas Horton

There’s been quite a bit of buzz lately about rising home-insurance premiums, with Allstate (NYSE:ALL) notably raising rates in some states by double digits. The reason for this, interestingly enough, has to do with very low yields on Treasury bonds, which insurance companies have to maintain a significant position in. Because the return on those bonds is so low due to monetary activism and various easing initiatives by the Fed, increasing premiums is one of the few ways insurance companies can increase returns.

While it’s undoubtedly an extra burden on homeowners, investors in the stock seem to favor it. Take a look below at the price ratio of Allstate relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/ALL is outperforming (up more/down less) the denominator/DIA.

alldia031412 300x178 Investors Like Hiked Insurance Premiums
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I’ve annotated the chart to show that Allstate began to outperform in late September of 2011, with a strong period of strength occurring since. The ratio trend in leadership still seems to be in place.

If anything, it may be accelerating. Part of this likely has to do with the reflation theme I keep stressing in my writings, but the fact is that rising premiums are hard to counter by looking at competitors given that there are fewer and fewer choices. This also means the premiums are likely to be sticky, meaning they may not fall back down even as things improve and returns on insurance holdings rise as yields perk up.

Either way, at least for now, investors are betting that Allstate can continue to outperform even if it’s at the expense of customer dissatisfaction over cost.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/investors-like-hiked-insurance-premiums/.

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