We recently compiled a list of the 10 Best Property & Casualty Insurance Stocks to Buy. In this article, we are going to take a look at where The Allstate Corporation (NYSE:ALL) stands against the other property and casualty insurance stocks.
Property and casualty (P&C) insurers face the hardest market mainly because of the increasing expenses, large claims payouts, and price-shopping policyholders. To revive the growth, they are required to shift to a more proactive strategy and exploit new developments and opportunities available in auto, homeowners’, and renters’ insurance.
With several insurers posting sound profitability in 2023, and in response to some notable improvements in the reinsurance market, the insurance market in 2Q 2024 was growth-oriented yet disciplined. Insurer strategies were focused on underwriting and pricing for profitability and program stability. As we approach the mid-point of the decade, the property & casualty insurance industry continues to see significant transformation led by technological advancements, fluctuating consumer preferences, and evolving regulatory landscapes.
Property & Casualty Insurance is expected to leverage digital technologies to enhance customer experience. This will be in the form of interactive digital ecosystems, building unique customer intelligence, and incorporating products and services to meet the demands of a digital world. Insurers plan to adopt technologies like artificial intelligence (AI), machine learning, and the Internet of Things (IoT) to enhance customer service and streamline processes.
Climate Change and Property and Casualty Insurers
The increase in weather-related losses and inflation-impacted costs to revive the damaged assets continue to weigh on homeowner insurers’ profitability. As we all know, this is a segment that was already under stress due to years of persistent high loss ratios. Deloitte reported that, in 2022, ~75% of the property and casualty sector’s insured losses, or US$74 billion, were associated with the US homeowner segment.
With the severity and frequency of losses due to natural catastrophes continuing to increase at an estimated average annual growth rate of 5% – 7%, experts believe that US homeowners might see up to US$118 billion in losses by 2030 end as a result of weather events. In this situation, what should be an approach for Property and Casualty Insurers?
Insurers, in alliance with government agencies and policyholders, should invest ~US$3.35 billion in residential dwelling resiliency measures. It is being said that two-thirds of the US homes which are not built as per the codes can be made in such a way that they can steer through weather-related claims losses.
Deloitte also stated that such actions might help the property and casualty insurers save ~US$37 billion by 2030 end.
The rise in insurance rates is the most preferred way for property insurers to offset higher costs of catastrophic events. Property and Casualty Insurers shore up their premiums on homeowners so that they can make up for the rising losses. This can mean hefty profits for the leading property and casualty insurers.
S&P Global stated that, throughout the US, most of the property and casualty insurers have increased their rates for homeowners’ coverage by approximately double digits over the last year. As per NOAA, the US saw ~28 weather and climate disasters last year, outpacing the previous high of ~22 disasters in 2020. The atmospheric and oceanic conditions can result in an extremely active hurricane season. NOAA also stated that the hurricane season kicked off to a violent start with Hurricane Beryl. This is the earliest category-5 Atlantic hurricane on record.
Higher Costs and Weather-related Catastrophe Losses
More and more natural disasters continue to damage assets every year. The number of US catastrophic events went up by ~32% between 2019 and 2022. As a result of this, property and casualty insurers’ losses escalated from US$25 billion in 2019 to US$99 billion in 2022. This made a whopping ~80% of the global natural catastrophe losses. A recent report from Swiss RE has suggested that total insured losses worldwide due to weather-related natural catastrophes exceeded $122 billion last year.
Adding to this, Capgemini revealed an eye-shattering ~250% increase in economic losses in the previous 3 decades because of climate and extreme weather events.
Over 2020 and 2023, replacement costs for property and casualty-related losses increased by ~45%. This was seen when the overall inflation growth sat at ~15%. While some believe that climate change might be leading to disasters, housing demands are also driving the risk.
While the climate-related risk continues to persist, Americans still prefer to migrate to disaster-prone areas. Not only this, but they are also building higher-value homes in such regions. For example, over 1990 and 2020, ~44 million homes were built in regions where wildfires are quite common, like California and Colorado. As a result of such factors, there has been a deterioration in the US property and casualty industry combined ratio, from ~98.8% in 2020 to ~102.7% in 2022.
Amidst This Chaos, What Should Property and Casualty Insurers Do?
Property and casualty insurers should look for some alternative strategies such as loss prevention and mitigation if they want to maintain their viability in regions that are prone to extreme weather conditions.
The new homes, which are built with advanced construction materials, such as engineered timber, impact-resistant glass windows, and enhanced roof coverings, can sustain damage from severe weather conditions as compared to the existing homes. For example, the average annual expenses due to wind damage came out to be ~84% lower for the house which was built in 2022 to code compared to a 1990s-era home. As per Federal Emergency Management Agency, the average annual damages from climate change might fall by ~48% for homes meeting the specified criteria/codes.
As of now, ~35% of residences nationally have been constructed as per the desired standards and codes.
This means that property and casualty insurers can help the remaining ~65% of the homeowners improve their dwellings to meet the desired standards.
For example, the insurers can provide some policy premium discounts to homeowners. This will incentivize them to upgrade to hazard-resistant standards and codes. Property and Casualty Insurers might also make homeowners aware regarding the prevailing state-sponsored incentives.
Our methodology
To compile the list of 10 Best Property & Casualty Insurance Stocks to Buy, we used the Finviz stock screener and extracted the stocks related to the property & casualty insurance industry. Once we had our filtered list, we ranked the stocks based on analysts’ average price target upside, as of August 14.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A financial advisor giving advice to a couple, illustrating the personal finance and insurance products the company offers.
The Allstate Corporation (NYSE:ALL)
Average Upside Potential: 16.84%
The Allstate Corporation (NYSE:ALL) offers property-liability insurance solutions. It sells private passenger automobile and homeowners insurance with the help of independent and specialized brokers, and life insurance, annuity, and group pension products via agents.
The company’s strong execution capabilities supported 2Q 2024 financial results. Its revenues went up by 12% as compared to the prior year to $15.7 billion for the quarter mainly due to higher insurance premiums and increased investment income.
For fiscal 2024, ~9 analysts raised earnings estimates over the previous 60 days for shares of The Allstate Corporation (NYSE:ALL). The company has an average earnings surprise of ~more than 40%. The improvement in its Property-Liability underwriting results led to an increase in net income, which came in at $301 million in 2Q 2024 in comparison to a net loss of $1.4 billion in the prior-year quarter. The Allstate Corporation (NYSE:ALL) focuses on modernizing its pricing, and the efforts are paying off.
On the YTD basis, the company’s shares have risen by over ~25%. Across consumer insurers, auto results continue to improve, with rate hikes supporting them to turn around a business that was lagging. The Allstate Corporation (NYSE:ALL) saw healthy improvement during 2Q 2024 in home insurance. This was partly due to narrower catastrophe losses, as they declined by $573 million from a year ago to sit at $1.6 billion. All these reasons have led to the share price appreciation. The company mentioned that it sees an opportunity to grab a share in home insurance.
The Allstate Corporation (NYSE:ALL) was included in 59 hedge fund portfolios at the end of Q1 2024, up from 51 in the previous quarter, as per Insider Monkey’s database. The Allstate Corporation (NYSE:ALL) increased its price objective from $191.00 to $205.00, giving the company an “Outperform” rating on 4th August. Diamond Hill Capital, an investment management company, released 1Q 2024 investor letter. Here is what the fund said:
“Other top contributors included The Allstate Corporation (NYSE:ALL), Caterpillar and General Motors. Allstate, one of the US’s largest auto and homeowners’ insurance providers, is benefiting from improving profitability in its primary auto insurance line. Further, milder weather during the quarter translated into lower catastrophe losses.”
Overall ALL ranks 3rd on our list of the best property and casualty insurance stocks to buy. While we acknowledge the potential of ALL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ALL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.