Stocks went on another rollercoaster ride this week, but the steep rises and sharp falls should have little bearing on U.S. insurance companies, according to industry observers.
After a major selloff earlier in the holiday-shortened week, the broader markets finished the week ending Jan. 4 in the green. The S&P 500 rose 1.86% to close at 2,531.94, but the SNL U.S. Insurance Index dipped 0.12% to 960.84.
The ripple effects of a possible economic slowdown in China, which sent markets skittering after technology giant Apple Inc. cut revenue guidance, do not threaten the operations of domestic insurers, said Keefe Bruyette and Woods analyst Meyer Shields. A weakening economy could mean lower interest rates, which would impact carriers' investment income, Shields said in an interview. But even that would not hit financial results in the sector significantly.
"Most of the companies' valuations reflect where the overall markets are trading," he said.
Equity market weakness earlier in the week prompted Sandler O'Neill to upgrade big life insurance names MetLife Inc. and Brighthouse Financial Inc. The selloff in life stocks was especially curious as broader equity market declines could be a positive for those companies because their investment products would become more attractive, analyst Paul Newsome said in an interview.
"There's an expectation for improved growth in sales because those products are typically safer than equity products," he said.
Life insurance companies on the whole outperformed property and casualty companies during the week; managed care companies tended to underperform the rest of the insurance index.
MetLife's shares rose 2.97% for the week to $42.28, and Prudential Financial Inc. climbed 4.11% to $84.90. Brighthouse's shares gained 5.0% to close at $32.81.
Berkshire Hathaway Inc. saw its shares tumble 4.25% to $293,000. Progressive Corp. slipped 1.45% to $59.46 and Allstate Corp. was virtually flat for the week, ticking down 0.02% to $82.61.
Analysts were encouraged by Hanover Insurance Group Inc.'s announcement that it had closed the sale of its Lloyd's of London-focused business Chaucer PLC, and were especially keen on management's plans for the proceeds. The company expects up to $940 million from the sale and announced a $600 million share repurchase program that includes a $250 million accelerated repurchase agreement. A special dividend of $4.75 per share means the company planned to return $450 million to shareholders within months of the sale, CFO Jeffrey Farber said during a conference call to discuss the closing.
"When the [accelerated share repurchase agreement] is completed in mid-2019, we will review how much of the approximately $400 million additional deployable equity freed up from this transaction has been redeployed and then assess our current position and next steps," Farber said, according to a transcript of his remarks.
Sandler's Newsome in a Jan. 2 note said Hanover's quick redistribution of capital will sustain its already relatively high return on equity.
"[Hanover] is doing what it previously told investors it would do — deploy the proceeds of the Chaucer sale quickly through a combination of a special dividend, debt reduction and stock repurchases, but it is doing it at a pace that is faster than we anticipated," he wrote.
The insurer's share price jumped following the announcement, but then declined in subsequent trading sessions. For the week, Hanover's shares were off 1.58% at $114.93.