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Invest in These Insurance Stocks to Boost Your Portfolio in 2H

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The coronavirus pandemic had severely impacted the performance of most of the industries across sectors. However, things started to look up from the third quarter of 2020.

The insurance industry was no exception to the scenario and faced operational challenges. However, it is well-poised to push the boundaries on the back of its fundamental strength. In fact, the industry has rallied in a year’s time.

Factors Likely to Impact Insurers in 2H

Cat Environment

The second half of the year traditionally bears the brunt of hurricanes. Per Colorado State University (CSU), 2021 is likely to witness above-average hurricane season that may have 17 named storms, including eight hurricanes and four major hurricanes. This year’s hurricane season could be about 140% of average season per CSU. Nonetheless, insurers’ prudent underwriting, improved pricing, favorable reserve development and sturdy capital level should help them withstand the impact.

It is worth mentioning that last year witnessed a very active hurricane season. Underwriting profitability of insurers was affected by occurrences of these catastrophe events. The impact of pandemic further aggravated the scenario. Per a report published by Swiss Re Institute, global insured catastrophe losses incurred in 2020 were $83 billion, which made it the fifth-costliest year in record.

Per American Property Casualty Insurance Association and Verisk, private U.S. property/casualty insurers’ profitability (measured by annualized rate of return on average policyholders’ surplus) was 6.8% in 2020, down from 7.8% in 2019. Net income dipped 2.9% year over year. However, underwriting gain increased 37.8% and combined ratio improved 20 basis points to 98.7 on a year-over-year basis. Industry surplus moved up 7.4% to $910.2 billion at 2020 end.

Pricing Continues to Firm Up

Catastrophic occurrences weigh on insurers’ underwriting profitability. Nonetheless, price hikes by industry players should help them stay afloat.  However, insurers continue to witness improved pricing. Per Marsh, global commercial insurance prices in first-quarter 2021 increased 18% — marking the 14th straight quarter of price increase. According to Willis Towers Watson’s 2021 Insurance Marketplace Realities report, except for one, 29 lines of business are expected to witness price rise this year.

Portfolio repositioning and reinsurance covers should help insurers counter the deficits.

Interest Rate

At its recent FOMC meeting, the Federal Reserve decided to keep interest rate unchanged within its target range of 0.20-0.25%. A near-zero interest rate is a concern especially for long-tail Property and Casualty Insurance providers and Life insurers (whose earnings are typically derived from the spread between their investment returns and what they credit as interest on insurance policies and products).

Nonetheless, 13 of the18 Fed officials are in favor of increasing the rate at least once by 2023, while 11 officials expect at least two by 2023. In fact, seven officials expect a rate hike in the next year itself.

Adoption of Technology

Greater use of technology like blockchain, AI, advanced analytics, telematics, cloud computing and robotic process automation are likely to help insurers in seamless underwriting and claims processing, which in turn will aid cost control and expand business.

Merger and Acquisitions

Insurers continue to pursue strategic consolidations to sharpen their competitive edge. Though the industry witnessed 674 deals for more than $100 million in 2020, the number was much lower than the year-ago tally of 774 deals according to Willis Towers Watson’s Quarterly Deal Performance Monitor and M&A Research Centre at The Business School. Notably, a better stage is already set for this year with reopening of economy, optimistic growth outlook, sturdy capital level and low rate environment (helping in borrowing funds at low coupon rate). Rob Kindler, Global Head of M&A at Morgan Stanley said, “All the elements are there for an active M&A market in 2021, from corporations looking for scale and growth to private equity firms and SPACs looking to invest capital.”

Stocks to Add to Your Portfolio

With the help of the Zacks Stock Screener, we have shortlisted five insurance stocks with a favorable Zacks Rank, supported by upward estimate revisions over the past 60 days, and an impressive Value Score of A or B. Value Score helps identify companies that are undervalued. The deviation from their fair value is what creates an exceptional upside opportunity. Also, back-tested results have shown that stocks with a favorable Style Score of A or B coupled with a solid Zacks Rank are the best investment bets.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Northbrook, IL-based The Allstate Corporation (ALL - Free Report) provides property and casualty, and other insurance products in the United States and Canada.

Zacks Rank #2 (Buy)
Value Score of A
The expected long-term earnings growth rate is pegged at 7.5%.
The Zacks Consensus Estimate for 2021 bottom line has increased 24.8% in the past 60 days.
The consensus estimate for current-year earnings indicates 6.2% year-over-year increase.

Emeryville, CA-based NMI Holdings (NMIH - Free Report) provides private mortgage guaranty insurance services in the United States.

Zacks Rank #2
Value Score of B
The Zacks Consensus Estimate for 2021 bottom line has increased 7.1% in the past 60 days.
The consensus estimate for current-year earnings suggests 16.4% year-over-year growth.

New York, NY -based Alleghany Corporation (Y - Free Report) provides property and casualty reinsurance and insurance products in the United States and internationally.

Zacks Rank #2
Value Score of B
The Zacks Consensus Estimate for 2021 bottom line has increased 18.9% in the past 60 days.
The consensus estimate for current-year earnings indicates 221% year-over-year improvement.

New York, NY-based Assurant (AIZ - Free Report) provides lifestyle and housing solutions that support, protect, and connect consumer purchases in North America, Latin America, Europe, and the Asia Pacific.

Zacks Rank #2
Value Score of B
The expected long-term earnings growth rate is pegged at 17.8%.
The Zacks Consensus Estimate for 2021 bottom line has increased 1.7% in the past 60 days.
The consensus estimate for current-year earnings implies 12.9% year-over-year increase.

Chicago, IL-based Old Republic International Corporation (ORI - Free Report) engages in insurance underwriting and related services business, primarily in the United States and Canada.

Zacks Rank #2
Value Score of A
The Zacks Consensus Estimate for 2021 bottom line has increased 14.6% in the past 60 days.
The consensus estimate for current-year earnings suggests 4.9% year-over-year increase.

Newark, NJ-based Prudential Financial Inc. (PRU - Free Report) provides insurance, investment management, and other financial products and services in the United States and internationally.

Zacks Rank #2
Value Score of A
The expected long-term earnings growth rate is pegged at 10.6%.
The Zacks Consensus Estimate for 2021 bottom line has increased 10.9% in the past 60 days.
The consensus estimate for current-year earnings suggests a 28.5% year-over-year improvement.

Columbus, GA-based Aflac Inc. (AFL - Free Report) provides supplemental health and life insurance products.

Zacks Rank #2
Value Score of A
The expected long-term earnings growth rate is pegged at 5%.
The Zacks Consensus Estimate for 2021 bottom line has increased 6.5% in the past 60 days.
The consensus estimate for current-year earnings implies a 5.4% year-over-year increase.

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