Khanchit Khirisutchalual
Starting coverage in 24 insurance companies, BMO Capital Markets analyst Michael Zaremski appointed Arthur J. Gallagher (New York Stock Exchange: AJG), Brown Brown (NYSE:BRO), Travellers (NYSE: TRV) and Progressive (New York Stock Exchange: PGR) as their top picks. A at the bottom of the pile, rates the shares of Lemonade Insurance (New York Stock Exchange: LMND) and Kinsale Capital (NYSE:KNSL) as Low performance.
Overall, “investor accumulation in security stocks has pushed multiples up 12% for insurers and 24% for insurance brokers over the past eight months, leading our stock selection process to generate more Market Perform ratings,” he said. That means investors need to be more selective in their choices, she said.
Last year, Lemonade (LMND) is the only stock of the aforementioned stocks that did worse than the 13% drop in the S&P 500, as seen on this chart. To compare key company statistics, click here.
For Arthur J. Gallagher (AJG), he sees “multiple surprise upside margin levers” such as hiring additions, the cumulative track of lower-risk M&A, less real estate and offshoring. In addition, the company will benefit from inflation, “a boon for brokers who get the benefit of rising premiums due to inflation, but don’t share in the risk of underwriting losses.”
Inflation is also helping brokerage Brown & Brown (BRO), which should benefit from “the expected upward inflection in trading pricing power,” Zaremski said.
Meanwhile, commercial insurer Travelers (TRV) long-tail reserves provide “confidence” in the overall reserve redundancy position, “breaking through EPS via better-than-expected profit margins.”
Property and casualty insurer Progressive (PGR) earns the top performance rating because “this auto-focused insurer can quickly turn its customer acquisition funnel on or off through its D2C (direct-to-consumer) channel to better manage inflation compared to your expenses. In addition, it has renewed its subscription process with “leading among peers” telematics data.
The insurance broker also earned an outperform rating as inflation is an underestimated source of EPS earnings per share.
On the other hand, Lemonade (LMND) deserves an underperform rating as “the reinsurance capacity it relies on to manage its capital base is becoming scarcer and more expensive,” Zaremski wrote. Also, your acquisition cost-expense ratio is too high.
The list of Market Perform qualified stocks are: Arch Capital (ACGL), American Financial (AFG), American International Group (AIG), Chubb (CB), Cincinnati Financial (CINF), Hartford Financial (HIG), Everest Re (RE) , RenaissanceRe (RNR), Selective Insurance (SIGI), Hanover Insurance (THG), WR Berkley (WRB), Allstate (ALL), Aon (AON), Goosehead Insurance (GSHD), Marsh & McLennan (MMC), Willis Towers Watson (WTW) and MediaAlpha (MAX).
SA contributor JP Research delves into Arthur J. Gallagher’s (AJG) inorganic growth playbook.
