American Financial stock spikes following deal news; Allstate ticks down

It was a busy week for insurance stocks as earnings season started in earnest, two sizable deals in the life space were announced, and amateur traders threw the broader markets into a short-squeezing feeding frenzy.

The S&P 500 endured some significant swings for the week ending Jan. 29, and ended up falling 3.31% to 3,714.24. The SNL U.S. Insurance Index dropped 3.65% to 1,164.98.

Early in the week, Allstate Corp. agreed to sell Allstate Life Insurance Co. and certain subsidiaries to entities managed by Blackstone Group Inc. for $2.8 billion. A day later, American Financial Group Inc. said it entered into a definitive agreement to sell its annuity business to Massachusetts Mutual Life Insurance Co. for $3.5 billion in cash.

Keefe Bruyette & Woods analyst Meyer Shields said in an interview that he views both deals as getting rid of businesses that detract from the value stories the two companies are trying to create.

"I think they feel an obligation to make the message as simple as possible," Shields said. "When you have the opportunity to do one-off deals that are not reliant on public valuations, then the shareholder value creation that we've seen, a little bit with Allstate, a lot with American Financial, is really the key underlying these decisions."

Market reaction to both transactions was positive, but Shields said the outperformance by American Financial's stock was due in part to the respect investors have for management's ability to "utilize cash in a way that favors shareholders."

On the other hand, Allstate indicated during a deal call that the company is comfortable with its growth opportunities and does not presently see a need to use its capital to make big moves.

Allstate shares ended the week down 2.94%, while American Financial took a spot among the biggest winners, with its shares shooting up 10.96%.

Several companies also released earnings this week or put out announcements related to fourth-quarter 2020 losses and reserve strengthening.

Heritage Insurance Holdings Inc. posted a notice that it expects to incur approximately $28.6 million of net current accident year catastrophe losses alongside $12.9 million of net current accident year other weather losses in the fourth quarter of 2020.

Piper Sandler analyst Paul Newsome in a note said the catastrophe losses for Heritage were higher than expected and most likely came from Tropical Storm Eta, which impacted Florida. The early results could mean that other Florida property and casualty insurers may also have fourth-quarter catastrophe losses that are greater than expected, Newsome said.

Heritage's stock ended the week sharply lower, down 9.16%.

Meanwhile, Everest Re Group Ltd. disclosed that it is increasing prior-year loss reserves by $400 million, which was attributed to the social inflation trends in the U.S. casualty market. In addition, the reinsurer expects pretax net catastrophe losses of $70 million, net of reinsurance and reinstatement premiums, and pretax net losses of $76 million related to the pandemic for the fourth quarter of 2020.

Everest Re shares tumbled 7.79%.

Brown & Brown Inc. reported earnings that reflected organic revenue growth of 4.7% in the fourth quarter of 2020, a 4.3% sequential increase. On the company's conference call, President and CEO J. Powell Brown stressed that the broker is not on an "international spending binge" and not "all of a sudden" ready to pay more than it has in the past for deal targets.

Brown & Brown's shares sunk 9.27%.

Fellow broker Marsh & McLennan Cos. Inc. also reported earnings this week. Its fourth-quarter 2020 net income attributable to the company was $374 million, or 73 cents per share, down from $391 million, or 76 cents per share, in the prior-year quarter. Marsh's stock slipped 1.44%.

Principal Financial Group Inc. became one of the first major life insurers to release its fourth-quarter 2020 earnings, showing year-over-year improvement in attributable net income. The company's stock, however, lost 7.84% for the week.

Competitors Voya Financial Inc., Prudential Financial Inc. and MetLife Inc. slumped 4.02%, 5.25% and 5.33%, respectively.