Insurance stocks are rallying as a way to play one of the hottest spots for inflation

Published Fri, Apr 19 202410:00 AM EDTUpdated Fri, Apr 19 202412:00 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The stubbornly high inflation readings to start 2024 are good news for one group of stocks — insurance companies. Motor vehicle insurance is up 22.2% over the past year, according to the Bureau of Labor Statistics , but some companies selling insurance are doing just fine. Shares of Allstate are up nearly 21% year to date, and Progressive is up over 31% in 2024. Both have hit all-time highs this year. PGR YTD mountain Shares of Progressive are up more than 30% this year. The rallies suggest that insurance companies — specifically, those that focus on auto and homeowners insurance — are successfully passing on inflation costs in those categories in the form of higher customer premiums. The rising cost of insurance is a somewhat delayed reaction to the rapid rise in auto prices and home repair costs in prior years. The increases show that insurers can protect their profit margins and then potentially see a windfall when inflation does cool. "We see a better-than-expected profitability inflection for auto insurers due to the impact of material price increases and decelerating claims cost trends for car repair and replacement," Goldman analyst Robert Cox said in an April 11 note to clients. Stocks to watch In general, Wall Street analysts are buying the underlying story for these insurance stocks. Allstate has a buy or strong buy rating from about 80% of analysts, according to LSEG. Goldman's Cox said in a late March report that the Northbrook, Illinois-based company offers more fundamental upside than peers in the year ahead. "ALL has increased pricing in-line with the industry over the past several years, but remains much further away from pre-pandemic profitability levels. Accordingly, we believe ALL will increase prices much more acutely over the coming 6-12 months versus PGR, which should increase profitability but continue to place pressure on growth," Cox said. Progressive and Hartford Financial Services Group also boast buy ratings from the majority of analysts, according to LSEG. For a slightly different angle, Wells Fargo analyst Elyse Greenspan upgraded Hamilton Insurance Group to overweight last week. Hamilton has a large reinsurance business as well, so it is less directly related to consumer inflation. "HG trades at the cheapest valuation among our [property and casualty] coverage, yet the shares have less reserve risk (due to loss covers) and is exposed to areas of the market seeing good [premium] increases," Greenspan said in a note. For investors looking for a broader play, there are not many pure insurance funds, but the iShares U.S. Insurance ETF (IAK) is up nearly 11% year to date. Potential downsides To be sure, there are several factors that could derail the rally for insurance stocks. For one, an extended rally raises valuation concerns for a group that is typically seen as a defensive play. "Disciplined pricing and the group's defensive risk profile are key positives. However, expectations for margins and growth seem optimistic and valuations are not attractive," JPMorgan analyst Jimmy Bhullar said in an early April note to clients. Another concern is so-called social inflation, in which legal trends or regulatory changes can drive costs higher for insurance companies. Two examples are the rising costs of personal injury verdicts in lawsuits and regulatory changes to allow consumers to involve third parties in the home-repair claims process. Andrew McGee, sector analyst at global research firm Third Bridge, said social inflation is expected to rise over time as younger generations that are more skeptical of big business populate jury pools. "That's definitely a concern for carriers and our experts, who have said that this cultural shift, demographic shift does have the potential to really increase not only the nuclear verdicts, like in a dollar figure, but in frequency as well," McGee told CNBC. And while insurance companies are often able to pass on costs to customers over time, there can still be significant volatility in their results quarter to quarter. For example, Progressive saw big swings in its auto insurance combined ratio — a key profitability metric —in 2021 and 2022, as rising inflation and a rebound in driving and traffic accidents quickly raised costs. And Travelers reported weaker-than-expected first quarter earnings on Wednesday, partly due to a jump in catastrophic losses related to weather. Those losses can be difficult to model and have led some companies to stop offering home coverage in disaster-prone states. — CNBC's Michael Bloom contributed reporting.