Barclays Raises Targets On Insurance Stocks Ahead Of Q3 Earnings

Fundamentals of the insurance sector continues to be weak, with pricing pressure, underlying margin compression and low investment yields. Despite this challenging backdrop, there is potential for continued book value growth, Barclays’ Jay Gelb said in a report.

Analyst Gelb expects P&C insurance stocks to “hold up well” versus other financials on account of “their defensive characteristics.” Consolidation in the commercial re/insurance industry could resume “once the election is over and macro conditions improve.”

Price Target, Estimate Changes

• American International Group Inc AIG – Overweight rating maintained, price target raised from $60 to $68. The EPS estimate for the current fiscal year has been raised from $3.73 to $3.78.
• Hartford Financial Services Group Inc HIG - Rated Overweight, with price target raised from $46 to $47.
• Allstate Corp ALL - Overweight rating maintained, price target raised from $74 to $79.
• Chubb Ltd CB Rated Overweight, with price target raised from $133 to $139.
• Travelers Companies Inc TRV – Equal-weight rating maintained, price target raised from $105 to $109.

Q3 Preview

Gelb mentioned the following for Q3:

• Travelers Companies’ renewal rate change in Domestic Business Insurance is expected to have been mostly stable in Q3.
• Allstate has continued to raise rates to improve its auto insurance margins. While the FY16 underlying combined ratio may improve to 88 percent, share repurchases could slow.
• American International Group should record ongoing improvement in its underlying P&C insurance combined ratio, along with significant share buybacks.
• Hartford Financial Services is focused on fixing its personal auto business. Challenges could continue, and the company is unlikely to sell its Talcott unit in the near term.
• Berkshire Hathaway Inc. BRK may record 2.1 percent sequential book value growth.

“In a challenging environment, we view the insurance brokers (especially MMC) as having the best potential to generate profitable growth. In personal lines, Allstate is on a path to improving personal auto margins. In primary commercial insurance, we view the new CB as a core holding. AIG offers the highest prospect of returning excess capital to shareholders. Berkshire Hathaway would benefit from a faster economic recovery but industrial and rail comparisons remain challenging,” the analyst wrote.

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