BofA sees beaten down insurance stocks primed for rebound

by Bernard Goyder and Geoffrey Morgan

A brutal stretch for shares of major US insurance companies looks set to end, according to Bank of America Corp., as attractive valuations and a profit rebound may lure back investors.

US insurance stocks have fallen 2.5% in the last three months, a period in which the S&P 500 has rebounded 12%. Warren Buffett’s Berkshire Hathaway Inc. is down 8.6% during that time, while Progressive Corp. has dropped 13%.

The property and casualty industry’s woes owe in part to a string of disasters, from the Los Angeles fires to an active tornado season. While premiums have risen, volatile markets have also weighed on some portfolios.

Making matters worse, investors appear to have rotated into banks from insurers, BofA analyst Joshua Shanker said in an interview. The disparity in returns has created an opportunity to buy back into the beaten down sector, he said. 

“You see the huge performance gap — large cap insurers are down 10, 15, even 20% over the last four months, and you’re looking at some of the big banks up 30%,” he said. “You have to ask yourself whether it’s all fundamental or whether there is this rotation, that one sector’s gotten love and one sector got unloved.”

Banks and insurers both tend to lure more conservative, value style investors looking for stable returns. But shares in US lenders have been bid up lately on speculation that regulatory reforms will stir M&A among regional banks sector, with the KBW Nasdaq Bank Index up 13% year to date. Insurers haven’t seen any benefit. 

The selloff has sent peice-earnings multiples for insurers in the S&P 500 Index to below 14 from above 16 in the past three months. Bloomberg Intelligence expects profits in the sector to jump more than 10% in 2026, up from anticipated growth of just 7.4% this year.

There may still be reason for caution, according to Daneshvar Rohinton, a portfolio manager investing in financial and insurance stocks with Industrial Alliance.

“It’s not a no-brainer to jump in with both feet,” he said. 

Hurricane season is around the corner and there are expected to be 16 named storms in the Atlantic this year, compared with an average of 14.4 between 1991 and 2020, a widely-watched forecast from Colorado State University indicates. Even more worryingly for insurers, once-hot property insurance prices are starting to cool. 

Rohinton said he would consider buying back into the space if the insurers and brokers slide another 10%. Right now, he said, “We’re closer to no man’s land.”

Shanker is more optimistic. He has buy ratings on the likes of Arch Capital Group Ltd. and RenaissanceRe Holdings Ltd. Arch has a market capitalization of $33.5 billion - and shares have dropped 2.8% so far this year. RenRe’s share price is down almost 3%, knocking its market cap nearer to $11 billion. 

He tips Progressive to bounce back strongly because of its ability to accurately price risk. 

“Progressive is a giant baleen whale with its mouth open taking in all kinds of risk, good and bad,” he said. The company is “indifferent to taking the bad risk, because they think they have the right price for it, and in almost any market, Progressive can grow and adapt,” he said.

Progressive, best known in the US for its ads featuring Flo, has long been an investor darling, delivering soaring returns over the past two decades. That doesn’t insulate it from periods of stress, as evidenced by the 15% slide it endured over June and July.

The stretch of poor performance for the industry has drawn rankled insurance CEOs.

Property and casualty insurance “is over-rotated to a point where just too much money is being moved out of the sector,” Andrew Robinson, chief executive of Skyward Specialty Insurance, a Nasdaq-listed commercial insurance company, told Bloomberg.

Skyward’s shares have plunged by about a quarter since the start of June, wiping out more than half a billion in market capitalization. 

“We are so heavily oversold,” said Robinson, despite “growing at 18% and growing earnings at 25% a year.” 

Wall Street brokers mostly agree, with six sell-side analysts giving Skyward an outperform rating.

Reinsurance, the business of selling insurance to insurance companies, is a rare area where European-listed industry leaders like Swiss Re AG and MunichRe AG are valued more highly than a cohort of mostly Bermuda-based US-listed stocks. 

“We are very contrarianly bullish on US-listed reinsurance,” said Shanker, who adds that the “huge gap” between Bermudan reinsurers and their European competitors makes the sector “exceedingly attractive”. 

Copyright Bloomberg News