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Extreme weather risks and insurance stocks: Investment guide

2023 was a year of extreme weather with 22 billion-dollar disasters occurring in the calendar year, according to the National Centers for Environmental Information (NCEI). With extreme weather instances on the rise, how are insurance companies coping with potential fallout from these events?

CFRA Research Vice President Cathy Seifert joins Market Domination to give insight into the impact these extreme weather phenomena are having on insurance companies and what investors need to keep in mind when adding these names to their portfolios.

Seifert outlines the current landscape for insurers in the sector: "The insurance industry really has not seen this kind of pricing power in decades. And I would argue that this pricing power that the industry currently has is likely to be a secular trend, not a cyclical trend. This is good for insurance investors. I think you have to choose carefully depending upon a particular company's strategy, how well they've historically underwritten and things like that."

She references insurers with "pricing power, but either have a diversified book of business so that they don't have outsized exposure to one particular line of coverage, or one particular area to, and also have lines of coverage that is not necessarily as exposed to severe weather." This includes primary insurer and reinsurer Arch Capital (ACGL).

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For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

With extreme weather comes extreme insurance premiums.

But how much of an impact will it make for investors?

We're taking a look in the Yahoo Finance playbook and joining us now is Kathy Cert CFR A research is Vice president of equity research who is looking at this, Kathy.

It's good to see you.

This is a really interesting topic.

We just heard Rick talking about the effect that it's having so sort of big picture here.

Um Are insurance companies far and wide rethinking where they can operate and how they can operate because of changes in weather.

Yeah, I mean, that's a really good question and your previous guest really sort of, you know, t things up nicely and just to kind of, you know, for by way of a little bit of background, we're now six years into a hard insurance pricing cycle and this is something that's unprecedented.

The insurance industry really has not seen this kind of pricing power in decades.

And I would argue that this pricing power that the industry currently has is likely to be a secular trend, not a cyclical trend.

This is good for insurance investors.

Um I think you have to choose carefully depending upon a particular company strategy, how well they've historically underwritten and, you know, things like that.

But, you know, within, um, the homeowners and the personal auto lines of coverage, the industry has not made a profit in quite some time from underwriting.

There are a handful of companies that do, but for the most part, um, those lines of business have been unprofitable.

Um, the way I think to play this is to pick names of those insurers who have pricing power, but either have a diversified book of business so that they don't have outsized exposure to one particular line of coverage or one particular area.

Um and also have lines of coverage that is not necessarily as exposed um to severe weather.

So, you know, along those along that score, I like arch capital, they're a reinsurer and a primary insurer.

They don't necessarily write a lot of catastrophe insurance.

They're growing their top line mid teens, which is faster than the overall industry.

I see the broader industry growing around 6 to 7 per 7 to 10% this year.

Um We thought that things were going to soften a bit in terms of pricing the first quarter numbers from the commercial lines insurers um to showed us that premium, we're up almost 8% and a lot of that is driven by the same things that's driving the personal on space and that is commercial property that's impacted by weather and commercial um auto, which is I impacted by a lot of the same things that impact personal auto.

Um So I like, I like arch capital.

I also like a IG.

They're in the throes of a restructuring and they have done and I think they've done an admirable job of um reducing the risk profile of their property casualty book of business.

While at the same time cleaving themselves into as opposed to being a multi line insurer, they are now a IG, a property casualty insurer with Cobridge, a life and annuity or life and retirement insurer.

And they're in the process of um de consolidating.

Actually, they just de consolidated Cobridge.

So that's a turnaround play.

Um in the personal auto space.

I think the best underwriter is progressive.

They have best in class um underwriting analytics, the capabilities, the analytical capabilities, the ability to write um usage based insurance, which I think is going to be an important competitive um attribute as um consumers look for whatever ways they can to save money on auto insurance.

You would, you would, you, I'm progressive and we just pulled up that stock chart.

It's a nice move.

I mean, more than 30% this year, Kathy, more than 60% in the past 12 months.

WW.

Would you, would you still wanna carve out a position in progressive now or would you wait for a pullback?

I, you know, so it's interesting, we talked about sort of severe, you know, severe weather and um this hurricane season is expected to be really active.

What typically happens to the entire space when a hurricane hits is the stock sell off because people get concerned about claims.

So I think as we head in into hurricane season, investors might want to be mindful of those kind of opportunities.

I agree with you though.

I mean, progressive, you know, if you follow this industry, you tend to be a value investor.

Um progressive is a growth stock and it sort of breaks the mold of the typical PC insurer.

Um and honestly hesitated with this stock because it never looked cheap enough for me.

But then what I've seen over the last several years is progressive, kind of pulling away from the path because of their really significantly superior analytical capabilities that are going to serve them better as the as the insurance industry continues to grapple with all of these um climate change issues and the need to um streamline underwriting and get a more cost effective underwriting model to off at the rise in clean cost and progressives kind of already there.

Geico and Allstate are still playing catch up.

However, I I think Allstate's an interesting turnaround play.

There's some execution risk there, but, you know, I think they're attractive.

Um Yeah.