Forecasters are expecting another devastating hurricane season this year. Colorado State University’s Department of Atmospheric Science warns a “very active” season could bring 11 total hurricanes, including five “major” hurricanes (category three to five), and 23 named storms, compared to an average of 14.4 between 1990 and 2020. Meanwhile, the University of Pennsylvania’s Department of Earth and Environmental Sciences is forecasting an even more dire 33 named storms this year, citing high ocean surface temperatures in the Gulf of Mexico.
For most insurance companies, it’s a nightmare outlook that will lead to soaring costs as catastrophe claims spike—but for some, the carnage may perversely provide opportunity.
“If this grim forecast comes to fruition, it will likely buoy pricing for many lines of property-casualty insurance and reinsurance, providing certain underwriters’ shares with a catalyst,” CFRA Research analyst Catherine Seifert argued in a recent note.
Seifert described how some insurance providers and brokers that aren’t heavily exposed to hurricane-related catastrophe claims are benefitting from the strong pricing environment in the industry. Many insurers have been raising premiums by 10% to 25% (“or more”) each year due to rising catastrophe losses.
There has been increased damage to property from hurricanes, wildfires, floods, and difficult-to-forecast non-hurricane “supercell” storms in recent years, Seifert explained. “Once considered a ‘Florida problem,’ hurricane and coastal flood risk has broadened considerably,” she added, noting that nearly 7.6 million homes are now vulnerable to storm surges from a category four hurricane.
To her point, Pew Research found the frequency and cost of hurricanes has soared over the past two decades. Between 1983 and 2002, there were 96 major hurricanes that caused $546.3 billion in damage, but between 2003 and 2022, 244 similar disasters caused more than $1.95 trillion in damage.
Despite this rise in catastrophic property damage and a grim outlook for the trend to continue, property and casualty insurance companies have done quite well this year. The S&P 500 Property-Casualty Sub-Industry Index is up more than 17% year-to-date, outperforming the broader blue chip index, which is up roughly 15% over the same period. And Seifert expects more good times ahead for some of these insurance providers.
The analyst highlighted five insurance companies that are “well positioned to benefit from the likely ongoing industry-wide pricing power, or from other company-specific catalysts, while having a manageable level of exposure to catastrophes.” But she reminded investors to be cautious when selecting insurance stocks, as the hurricane season could be “disruptive and volatile” for some home and commercial-property insurers.
American International Group (AIG)
The insurance giant AIG is best known for its struggles during the Global Financial Crisis, but the company has transformed itself over the past 15 years. The new AIG is a much “more focused” property-casualty insurer, having separated from its life insurance and retirement business, Seifert noted.
The analyst went on to argue that AIG will benefit from rising insurance premiums and investment income, particularly after re-engineering its property-casualty book to have a “lower risk profile and reduced exposure to catastrophes.”
CFRA has a “buy” rating and a $90 12-month price target for shares of AIG, representing a 20% potential return for investors.
Arch Capital Group
Arch Capital Group provides insurance and reinsurance (think: insurance for insurance companies) and was formed in the wake of the September 11 terrorist attacks, when insurance coverage was difficult to obtain. Today, the company has a wide variety of offerings, from property-casualty insurance to professional-liability insurance, and is known for its nimble business model that allows it to shift to the most profitable insurance segments.
“We expect Arch to leverage favorable market and pricing conditions and produce operating revenue growth of more than 20% in 2024 and about 15%-20% in 2025, about double the rate of the broader insurance and reinsurance industry,” Seifert wrote.
CFRA has a “buy” rating and a $107 12-month price target for shares of Arch Capital Group, representing a 7% potential return for investors.
Arthur J. Gallagher & Co.
Arthur J. Gallagher (AJG) is a leading commercial-insurance broker and risk-management firm that has been growing rapidly through acquisitions for decades. The company makes 87% of its revenues through its wholesale and retail-insurance brokerage business, which is benefiting from rising insurance premiums and brokerage commissions.
CFRA expects 7% to 10% organic revenue growth in 2024 and 2025 from AJG, and noted that the company acquired 50 firms in 2023, contributing $826 million in revenue. “Revenue growth in 2024 and 2025 could likely top our forecast if pricing trends remain intact and AJG’s acquisition strategy remains on course,” Seifert wrote.
CFRA has a “buy” rating and a $272 12-month price target for shares of Arthur J. Gallagher & Co., representing a 7% potential return for investors.
Berkshire Hathaway
Warren Buffett’s mega-conglomerate Berkshire Hathaway may also benefit from rising insurance premiums. Berkshire owns the leading auto insurer, Geico, and offers reinsurance through its subsidiaries, General Re Corp. and National Indemnity Co. Buffett’s company also expanded its presence in the insurance space with its $11.5 billion acquisition of Alleghany Corporation in October 2022.
“Thanks mainly to the acceleration in reinsurance top-line growth, we expect all of Berkshire Hathaway to post operating revenue growth of between 10% and 15% in 2024 and between 12% and 15% in 2025,” Seifert wrote, noting that “these growth forecasts exclude the impact of any acquisitions, which we believe remain central to Berkshire’s overall strategy.”
CFRA has a “buy” rating and a $472 12-month price target for shares of AIG, representing a 15% potential return for investors.
The Progressive Corporation
The Progressive Corporation is one of the largest insurers globally, with $62 billion in written premiums. The company focuses on auto insurance, and Seifert argued that rising premiums coupled with falling claims as the post-pandemic driving surge slows should boost its profitability.
Seifert also highlighted Progressive’s usage-based insurance product called Snapshot, labeling it an “industry-leading product” that widened the company’s competitive advantage over its peers.
“We forecast operating revenue growth of 15%-20% in 2024, reflecting our view that net earned premiums will rise by between 15% and 20%, net investment income will rise by at least 10%, and fee income will rise by 15%-18%,” she added, noting that “these rates of growth are nearly double those of the industry average.”
CFRA has a “buy” rating and a $235 12-month price target for shares of AIG, representing a 14% potential return for investors.
