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The chances of a major hurricane hitting coastal America this year have ticked up. Market-lagging insurance stocks may see an opportunity for some shares to catch up.
Ricardo Ardugengo/ AFP via Getty Images
The chances of a major hurricane hitting coastal America this year have ticked up, according to forecasters. But among the market-lagging stocks of the insurance industry, the Atlantic hurricane season may actually prove an opportunity for some shares to catch up.
Stocks of insurance brokers such
Willis Towers Watson
(ticker: WTW) and
Arthur J. Gallagher
(AJG) have outperformed other parts of the insurance industry before and during the last 10 hurricane seasons—according to a Monday note by Raymond James analyst C. Gregory Peters. The season in which hurricanes hit the Atlantic and Gulf coasts tends to range from June through November.
Forecasters at Colorado State University had expected a milder-than-average season this year. Now, Peters notes that their forecast has edged up to a “near-average” outlook for 15 storms with winds above 40 miles-per-hour, seven hurricanes, and three major hurricanes. There’s about a 40% probability that one of those major hurricanes will make landfall.
Insurance stocks haven’t had a banner year. While the
S&P 500 index
rose nearly 16% in the year’s first half, the S&P Insurance index slid 2%. The worst-performing insurance sector this year has been casualty insurers who sell mainly to individuals, including companies such as
Allstate
(ALL)—whose shares are down 20% so far this year—and
Progressive
(PGR)—whose stock is up just 2%. Commercial-insurance stocks, such as
Chubb
(CB) and
Travelers
(TRV) have also had a down year.
As Barron’s recently reported, reinsurance pricing has been firm this year. That has moved some primary insurers to retain more of their exposure to catastrophic losses (like hurricanes) on their balance sheets. For most, that exposure remains a small percentage of their March 2023 book value, says Peters, the Raymond James analyst. The highest percentages were 8.4% of book value at
Hanover Insurance Group
(THG), and 15.2% at Travelers.
Travelers’ retained exposure may appear high, Peters notes, but he believes the company’s diversification and underwriting skill will help ward off a “worst-case scenario.” Compared with other insurers, Travelers has written less business in the Atlantic hurricane path. He rates both Travelers and its commercial insurance rival Chubb as Strong Buys, pointing out that their price-earnings ratios are one-third below their five-year averages.
Insurance-broker stocks have been among the industry’s best performers this year. The Raymond James analyst thinks that will continue.
Reinsurance stocks used to be the best performers around hurricane time. But in the last decade, the brokerage firms have outgained the industry, before and during hurricane season. That’s surely been the case this year, with the big insurance brokers up an average of 11% through June.
According to Peters’ research, the brokerage group has risen 9% on average during the hurricane season of the past 10 years, before dropping slightly in the postseason months. He rates Arthur J. Gallagher and Willis Towers Watson as Strong Buys.
Willis Towers Watson has struggled to win fans since the 2021 demise of its acquisition by
Aon
(AON). But Peters believes the broker will successfully reshape its business. Meanwhile its stock trades at a bargain multiple of 12 times forward cash flow, compared with about 16.5-times for Gallagher and other insurance brokers. Peters sees some 15% upside to Willis Towers Watson’s stock.
Write to Bill Alpert at [email protected]
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