US P&C stocks weather sector downgrade during busy earnings week

Hurricane Ian losses, a reinsurance capacity crunch and a sector downgrade were not enough to quell investor enthusiasm for US property and casualty insurance stocks this week.

S&P Global Ratings Senior Director John Iten during an Oct. 26 webinar said he has always believed it would take a “perfect storm” made up of multiple events to warrant a downgrade of the US P&C industry.

That storm has now arrived, prompting a sector downgrade by S&P to negative from stable.

“We’re seeing very large catastrophe losses,” Iten said. “And of course, the spike in loss cost inflation that’s hurting underwriting performance. We’re seeing that and then also a sustained decline in capital markets that’s eroding the value of the investment portfolios.”

Iten said the US P&C industry’s rating had been stable for at least 10 years and emphasized that it is not something that is often changed. The change to a negative outlook means that S&P Ratings now expects more negative than positive rating actions for companies over the next year.

The change was also due to higher claims costs, particularly in personal lines, something that Wells Fargo analyst Elyse Greenspan had flagged as a cause of concern.

“We are also cautious on the personal lines sector due to the elevated loss trend the sector is seeing, which has led to weak results this year,” Greenspan said in an Oct. 25 notes. Greenspan is particularly concerned about The Allstate Corp., which she believes has significant capital issues that are not “fully appreciated” by investors.

That call appeared somewhat prescient when Fitch Ratings revised its rating outlook for Allstate to negative from stable on Oct. 28, a decision mainly driven by a “sharp deterioration” in its underwriting results for the first nine months of the year, as well as adverse revisions to prior reserves outside of expectations.

But despite the negative sentiment, Allstate’s shares managed to rise 5.25% for the week ending Oct. 28.

P&C earnings:

Several other high-profile P&C carriers also saw their stock prices rise this week after disclosing third-quarter earnings.

Chubb Ltd. reported results that showed a significant drop in year-over-year net income. The insurer booked pretax catastrophe losses, net of reinsurance and including reinstatement premiums of $1.16 billion for the period, with $975 million of that amount stemming from Hurricane Ian.

Chubb shares closed up 8.45%.

Florida-based insurer Universal Insurance Holdings Inc. delivered positive news during its earnings call, as executives said legislation passed by Florida lawmakers aimed at restricting the excessive litigation against insurers is having a positive effect in the aftermath of Hurricane Ian.

Universal’s stock rose 7.01% on the week.

Renewal prospects:

As the end of the year approaches, several companies have warned that the Jan. 1 reinsurance renewals are likely going to be “rough.”

Insurance broker Brown & Brown Inc. became the latest to issue that warning this week. The company released third-quarter results that reflected a year-over-year increase in third-quarter net income, as well as a negative impact to profit-sharing contingent commissions of about $15 million and losses of approximately $11.5 million associated with capitalized captive insurance facilities. Both were related to the impacts from the estimated insured property losses associated with Ian.

Brown & Brown’s shares finished down 4.70%.

During WR Berkley Corp.’s third-quarter earnings call this week, CEO Rob Berkley said the company is considering expanding its participation in the property and catastrophe insurance space if market conditions are right. The company also announced the formation of Berkley E&S Solutions, a new business that aims to provide surplus lines casualty coverage to middle-market and large accounts through individual wholesale broker appointments.

The insurer’s shares were mostly flat on the week.

Centene Corp. found a spot among the biggest winners of the week. The managed care company revealed a: total third-quarter revenue of $35.87 billion, up 11% from the prior-year quarter, which was largely driven by organic Medicaid and Medicare growth.

Despite those results, Centene CEO Sarah London said during the company’s earnings call that she expects significant headwinds due to a recent decline in Medicare Advantage star ratings as well as a legal challenge surrounding California Medicaid contracts.

Centene’s shares added 16.18% on the week.

The S&P 500 climbed 3.95% to end the week at 3,901.06, while the S&P 500 US Insurance index rose 5.80% to 582.73.

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