Let me be the first to admit that investing in the insurance industry is about as exciting as watching paint dry. Thanks to the attention the sector is getting because of Hurricane Harvey, however, boring can be beautiful.
First thing’s first. Insurers are going to be fine after Hurricanes Harvey and Irma. The industry has an enormous cash cushion, estimated by CFRA at $300 billion. Early estimates from JPMorgan indicate that insurance losses from Harvey could be between $10 billion and $20 billion, a fraction of the storm’s total economic costs, which may reach as high as $100 billion. As if that weren’t enough, now comes word that Hurricane Irma may batter the East Coast with winds nearing 150 miles an hour.
Unfortunately for the people in the Gulf Coast, most of the damage caused by Harvey will be classified as flood damage which isn’t covered by homeowner’s policies. The same will likely hold for Irma if it reaches landfall. Of course, that’s good news for holders of insurance stocks, which have gotten battered along with everything else in Harvey and Irma’s path.
Automobiles and cars are a different matter. Insurers also make a large portion of their profits from investment income, which thankfully isn’t subject to the vagaries of the weather. Insurers are also protected by Reinsurance, which is basically extra insurance for carriers to protect them from disasters such as Harvey and Irma.
Of all the companies with exposure to Harvey and Irma, three trades stand out — Allstate Corp (NYSE:ALL), Chubb Ltd (NYSE:CB) and American International Group Inc (NYSE:AIG) — because they trade at discounts of greater than 10% to their average 52-week price target. Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) is also a leading player through Geico and its other insurance businesses. However, Berkshire wasn’t part of my analysis since it’s such an outlier of a stock.
With that in mind, let’s take a closer look at these insurance stocks to buy.
Insurance Stocks to Buy: Allstate (ALL)
Investors looking for solid insurance stocks to buy should consider Allstate. ALL blew away Wall Street consensus forecasts in its latest earnings report. Investors also liked the company’s $2.9 billion share buyback plan as well.
Allstate’s auto and homeowner’s business have been improving thanks to price increases among other things. Allstate’s investment in improving customer service is also paying off. Indeed, personal finance website NerdWallet rates ALL at 4.5 out of 5 stars based on claims service and customer satisfaction.
Insurance Stocks to Buy: Chubb (CB)
Although Chubb CEO Evan Greenberg spooked investors with his talk of a “multi-year soft insurance market”, the company’s results weren’t too bad.
Total P&C underwriting income rose 20% to $808 million in the latest quarter and investment income for CB was at a record $855 million. When Ace acquired Chubb for $23.8 billion, it expected to achieve savings of $650 million.
The company, which changed its name to CB after the deal closed, now expects to achieve $875 million in savings by 2018.
Insurance Stocks to Buy: American International Group (AIG)
Yes, I realize that AIG’s triple-digit price-to-earnings multiple is tough to ignore, but given the company’s screwy history, it may be the right call in this case.
New CEO Brian Duperreault sent shares of AIG tumbling after he scrapped specific stock buyback targets that his predecessor Peter Hancock had initiated under pressure from activist investor Carl Icahn.
Instead, Duperreault will focus on “profitable growth” and will deploy cash “opportunistically” for buybacks. Although Duperreault’s move probably angered short-term traders, it’s good for AIG stock over the long run.
The company’s never-ending restructuring at AIG is also starting to pay off. During the most recent quarter, AIG’s operating income in its consumer business surged 32% to $1.26 billion as premiums and fees remained flat. The 15% decline in commercial premiums is actually good news because it indicates that AIG is taking a more disciplined approach to underwriting.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
