Stocks recover from rough start to week; P&C earnings season underway

Equity markets overcame a rocky start to the week to finish with solid gains amid the beginning of the second-quarter earnings season for insurance companies.

The week ending July 23 began with a selloff that sent shares to their worst one-day decline of 2021. The Dow Jones industrial average declined by more than 2% on July 19, while the S&P 500 slid nearly 1.6%.

The S&P 500, however, finished the week up 1.96% at 4,411.79. The SNL Insurance Index edged down 0.23% to close at 1,389.10.

Market observers blamed the Monday plunge on rising number of cases of COVID-19 in the U.S. and the associated risk of the economic recovery slowing. Piper Sandler analyst Paul Newsome said that's "in the mix" with inflation, which also is a concern for the companies he covers.

"Inflation goes straight to the profits of insurance companies," Newsome said in an interview. "People are looking at that and I think we're concerned in general."

However, Newsome said the type of inflation tracked by the federal government is not what concerns insurers like the property and casualty companies he follows.

"Social inflation claims and liability claims are half of their business, so what the courts are doing matters a lot," Newsome said. "Medical costs inflation, which hasn't spiked up yet, is also a bigger component. So while insurers are seeing general inflation ticking up, we don't know what that means for them yet."

P&C insurers are also feeling the effects of a faster-than-expected rebound in personal auto claims. The Progressive Corp. found that out firsthand as it reported that its second-quarter net income fell 56% year over year after a sharp increase in claims frequency.

"There is a lot of discussion about what the new normal is for the level of auto claims now that we're getting out of the effects of the stay-at-home orders, and there are severity issues," Newsome said. "Part of it is we don't really know how the total driving behavior is different today than it was before the pandemic started."

Progressive's stock slid 1.51% on the week.

As far as second-quarter earnings go for the wider group, Newsome said a normal level of catastrophe losses for the quarter and strong investment income have gotten things off on a positive note.

The Travelers Cos. Inc., down 5.45%, reported a year-over-year rise in net income. RLI Corp., down 1.69%, had an increase in operating earnings, while W. R. Berkley Corp., down 2.50%, tripled its net income compared to the prior-year quarter.

In the life space, Prudential Financial Inc.'s pending sale of its retirement services business to Great-West Lifeco Inc. and subsidiary Empower Retirement LLC for $3.55 billion is yet another element of the company's plan to shift its business mix toward "high-growth businesses," according to Wells Fargo analyst Elyse Greenspan. While the divestiture should result in a reduction in interest-rate exposure for Prudential, it could also lead to a lower earnings profile, she said in a note.

Prudential finished the week up 0.78%, and Great-West added 0.84%.

In managed care, Cantor Fitzgerald analyst Steven Halper characterized Anthem Inc.'s earnings report as strong and said the company is likely to see top-line growth and margins widening over time.

Halper called Anthem's stock, which declined 2.87% on the week, "compelling" because it is trading near 13.7x his 2022 EPS estimate.