The latest Consumer Price Index (CPI) data showed prices increasing 5.4% in the past 12 months, the largest CPI jump since August 2008. While Federal Reserve Chairman Jerome Powell has said he believes the recent inflation will pass due to pricing pressures on materials and wages, some economists, like former Treasury Secretary Larry Summers, are concerned it could stick around for a while. In the Fed's most recent summary of economic projects from June, officials indicated there could be two rate hikes as soon as 2023, or sooner if inflationary pressures continue.
If inflation does linger, and interest rates rise, one industry that could benefit is insurance. Insurance companies invest their unused capital to generate additional revenue, and buying bonds is a popular way to do that. Inflation can be hard to predict, so a good strategy for investors is to own solid long-term performers that could get an additional benefit from rising interest rates, like Chubb (CB 0.97%), Progressive (PGR 0.37%), and Allstate (ALL 0.80%).
Chubb is one of the largest property and casualty insurers in the world, underwriting a variety of insurance from commercial lines of coverage, like workers compensation and professional liability, to personal lines of coverage like automobile and homeowners. For decades, Chubb has enjoyed a strong capital position, which is why the company has been able to achieve Dividend Aristocrat status -- a title given to companies that have increased their dividends for 25 years or more. The company has raised its dividend for 28 years straight and is in good position to keep it going.
Chubb faced elevated claims amid the coronavirus pandemic in 2020, but it has bounced back nicely in 2021. In the most recent quarter, Chubb reported its best organic growth -- or growth that excludes effects from mergers and acquisitions -- in more than 15 years. Property and casualty premiums increased 15.5% in the quarter, helping revenue grow 7.6% to $9.6 billion. This flowed to the bottom line as the insurer posted net income of $2.2 billion after losing $331 million in the same quarter last year.
In the first half of this year, Chubb generated 8.9% of its total revenue from investment income. The company is cheap, with a price-to-earnings (P/E) ratio just above 10 at Wednesday's close, and would certainly get a boost in a rising interest rate environment.
Progressive is another solid insurance company that's best known for its auto insurance, along with other coverage options for things like motorcycles and RVs. The insurer was an early mover in the telematics space, or usage-based insurance, when it introduced its Progressive Snapshot product back in 2011. This, along with its laser focus on auto insurance, has helped the insurer post stellar profit margins, helping the company beat the S&P 500 for over a decade now.
Progressive is in a strong position in the auto insurance market. It owns a 12.9% share of the personal auto insurance market and a 12.1% share of the commercial market. Despite being the top commercial auto insurance provider, Progressive continued to expand its offerings when it purchased Protective Insurance Corp. for $338 million, a deal that closed in June.
In the most recent quarter, Progressive saw net premiums increase 13.8%. However, larger loss expenses caused net income to decline 56% to $790 million in the quarter. The insurer has been hurt in the first half of this year as its property insurance coverage took a hit due to outsized claims from extreme weather events.
Investors shouldn't dwell too much on one quarter, though. Progressive has a history of healthy profit margins, as seen by its combined ratio, which is a key metric of an insurer's profitability. A ratio under 100% means the company is underwriting profitable policies, and Progressive has managed to achieve an impressive annual combined ratio of 96% or lower for over 20 years.
Progressive is also trading at a cheap valuation with a P/E ratio 10.3. While Progressive's investment income is only about 1.8% of its total revenue for the first six months of 2021, it would still welcome a rising interest rate environment, which would boost investment income for the already stellar company.
Allstate is another great insurer worth your consideration, especially as the company has made moves to scale up and improve its profitability in the past year.
In January, Allstate closed its acquisition of National General for $4 billion, boosting the company's market share in the property and casualty space by 1% and bringing its total market share to 10%. The move expands Allstate's channel of independent agencies to 42,000, while also adding National General's technology. This should improve the insurer's efficiency, too.
But that wasn't all. The insurer also recently announced a deal to acquire SafeAuto, a non-standard auto insurance carrier, for $270 million in cash. The purchase will expand the company's customer base and its affordable insurance solutions for customers. Its strategic moves are one reason why legendary investor Carl Icahn added Allstate to his portfolio last year.
Allstate saw solid earnings in the second quarter, as total revenue increased 22% to $12.6 billion. Despite seeing increased claims compared to last year, the company's net income still grew at a stellar 30% to $1.6 billion in the quarter.
During the first half of the year, Allstate generated nearly 6.7% of its total revenue from investment income and would certainly benefit from rising rates. This, coupled with its acquisitions, and a very cheap valuation with a P/E ratio of 5.6 (adjusted for discontinued operations), makes Allstate another solid company worth buying to protect your portfolio against inflation.