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Managing Market Risks
Seeking assurance in insurance
Amid economic uncertainty, property & casualty insurance stocks stand out for their combination of offensive and defensive characteristics, according to Fidelity's Matt Reed.
- The early 2023 U.S. regional banking crisis highlighted the importance of choosing carefully when investing in the financials sector, and Fidelity's Matt Reed believes well-positioned property & casualty insurance providers deserve a look amid elevated inflation, rising interest rates, and economic uncertainty.
- "Although inflation is increasing the cost of claims, the insurance industry was already in the process of boosting premiums, given the persistence of social inflation, meaning the rising costs of claims associated with more expensive court settlements," highlights Matt Reed, portfolio manager of Fidelity Advisor® Financials Fund.
- In running the sector-focused fund, Reed targets high-quality companies he believes can drive robust growth and risk-adjusted shareholder returns, as well as improving businesses that he feels are underappreciated by the market.
- Lately, Reed has been assessing the impact of rising interest rates, which he says support the need for higher returns, particularly in areas like reinsurance, because firms that allocate capital to underwrite risk must, understandably, be adequately compensated.
- He explains that this is largely because when compared with what investors perceived to be essentially risk-free investments—short-term U.S. Treasuries, as one example—returns for such securities have ticked up lately.
- "Additionally, it's important to remember that insurers make money from the 'float' on premiums that are paid ahead of when claims are due, which should prove to be a tailwind in today's higher-rate environment," Reed points out.
- While rising inflation and a growing economy can impact claims costs, it means there is greater demand, as the value of insurable assets increases.
- Pivoting to the defensive side of the insurance industry, Reed feels that even if the economy does stumble, while P&Cs won't be completely immune, they should be subject to less risk than more credit-sensitive groups within the financials sector.
- Thus, he feels that having exposure to P&C firms provides ballast within the portfolio during an economic slowdown and, in the worst case, a recession.
- He cites Chubb and Hiscox as two prime examples of fund holdings (as of October 31) that could benefit from these trends.
- "Both of these P&C providers have unique, global characteristics that offer opportunities to grow their franchises through successive business and economic cycles," concludes Reed.