William Blair Says Buy Auto Insurers, 'Bad News Is Good News'

While pointing out that accelerated repair costs resulted in margin deterioration over the decade, the brokerage thinks rate hikes are growing at a rapid pace compared to the recent past. As a result, insurers stand to gain from increased premium, as well as, enhanced margins. Rate hikes would also add about $40 billion in premiums in a multi-year period.

Related Link: Allstate Looking Very Shareholder-Friendly With Buybacks, Dividend Hike

In a research note, the analysts said, "Legacy insurers have no margin cushion at this point after seeing combined ratios rise for several years, which means rate increases should be high. This should drive personal auto industry DPW growth of 7 percent to 8 percent for 2016 and 2017, its highest level in nearly 15 years."

It is up to the auto insurers to make a head-start to gain market share to realize better margins as there is no level playing field in the sector. Therefore, winners and losers from the current market conditions will emerge.

The brokerage addressed four stocks:

At Time Of Writing ...

• Progressive Corp: Assigned Outperform rating on the expectation that top-line growth should accelerate between 12 and 14 percent.
• National: Outperform rating assigned as the company stands to gain from increased rates and enhanced margins while acquisition tactics will drive top line growth.
• Kemper Corp KMPR: Assigned Market Perform rating. The brokerage believes auto dislocation will help improve underwriting performance.
• Allstate Corp: Underperform rating assigned citing weak earnings prospects and an extended valuation.

• Allstate was down 1.24 percent at $68.37.
• Kemper was down 1.43 percent at $37.23.
• National was down 2.03 percent at $22.
• Progressive was down 1.88 percent at $31.40.

Full ratings data available on Benzinga Pro.