Digest

This episode of the Baron Streetwise podcast delves into the insurance industry, examining the challenges and opportunities presented by rising inflation and extreme weather events. The discussion begins with a listener question about using life savings for a down payment on a house versus keeping it invested in the stock market. Host Jack Howe, along with analysts Andrew Kligerman and Mike Zaremsky, provide insights into the current housing market and the potential impact of rising insurance costs on home prices. The conversation then shifts to the insurance industry itself, exploring the recent volatility in financial results for companies like Allstate, driven by factors such as the pandemic, increased accident severity, and regulatory delays in approving rate increases. The analysts discuss the importance of understanding the combined ratio, a key metric for evaluating insurance companies, and the role of social inflation, which refers to rising liability judgments, in driving up insurance costs. The episode concludes with stock recommendations, highlighting brokers like Aon and Arthur J. Gallagher, as well as insurers like Cincinnati Financial and The Hartford, which are well-positioned to benefit from the current market dynamics. The analysts also emphasize the importance of considering the relative size and uncertainty of the home and auto insurance markets when making investment decisions.

Outlines

00:00:00

Introduction and Listener Question

This Chapter introduces the Baron Streetwise podcast and features a listener question from Javier, a medical school graduate, about whether to use his savings for a down payment on a house or keep it invested in the stock market.

00:00:41

Insurance Industry in Upheaval

This Chapter delves into the current state of the insurance industry, focusing on the impact of rising inflation and extreme weather events on home and auto insurance. The discussion highlights the recent volatility in financial results for companies like Allstate and the challenges faced by insurers in obtaining regulatory approval for rate increases.

00:18:34

Stock Recommendations and Insights

This Chapter provides stock recommendations for investors interested in the insurance sector. The analysts discuss their favorite picks, including brokers like Aon and Arthur J. Gallagher, as well as insurers like Cincinnati Financial and The Hartford. They also offer insights into the relative size and uncertainty of the home and auto insurance markets.

Keywords

Q&A

• What are the key factors driving the recent volatility in the insurance industry?

  The recent volatility in the insurance industry is primarily driven by rising inflation, particularly in the areas of auto repair costs and liability judgments. The pandemic also played a role, initially leading to lower claims due to reduced driving, but subsequently contributing to increased accident severity and repair costs. Regulatory delays in approving rate increases have further exacerbated the challenges faced by insurers.

• What is the combined ratio and why is it important for investors?

  The combined ratio is a key metric used in the insurance industry to measure profitability. It represents the percentage of premiums paid out in claims and expenses. A combined ratio below 100% indicates profitability, while a ratio above 100% indicates a loss. Investors use the combined ratio to assess the financial health and profitability of insurance companies.

• What is social inflation and how is it impacting the insurance industry?

  Social inflation is a term used in the insurance industry to describe the rising cost of liability judgments. It is driven by factors such as increased litigation, higher jury awards, and changes in legal practices. Social inflation is putting upward pressure on insurance premiums, particularly in areas like commercial insurance, where large corporations are often the target of lawsuits.

• What are some of the investment opportunities in the insurance sector?

  The insurance sector offers a range of investment opportunities, including insurance brokers like Aon and Arthur J. Gallagher, which benefit from rising insurance premiums. Insurers like Cincinnati Financial and The Hartford are also well-positioned, with strong track records of profitability and expertise in specific market segments. Investors should consider the relative size and uncertainty of the home and auto insurance markets when making investment decisions.

Show Notes