Although the major indices gained on Sep 1, they started losing steam on Sep 2. Since then, the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite have declined 1.1% each.

September has historically been a sluggish month for the stock market. While there are several theories for this uncanny phenomenon, the most common notion is that investors take time off during the summer months, leading to an overall decline in trading volumes. Stock Trader’s Almanac shows that September has been the weakest month for the S&P 500 since 1950 and since 1971 for the Nasdaq.

Nonetheless, the insurance industry seems well-poised for growth amid this volatility. The industryhas gained 10.6% year to date, outperforming the Finance sector’s increase of 5.4%.   

Better pricing, increase in interest rate, exposure growth and solid capital position should help Axis Capital Holdings Limited (AXS Quick QuoteAXS - Free Report) , Chubb Limited (CB Quick QuoteCB - Free Report) , Cincinnati Financial Corporation (CINF Quick QuoteCINF - Free Report) and First American Financial (FAF Quick QuoteFAF - Free Report) deliver operational excellence and, in turn, better returns for investors.

The insurance industry is rate-sensitive. Insurers have been directing their funds into alternative investments like private equity, hedge funds, and real estate. Also, the interest is improving.  The Fed has already made three hikes in 2023, taking the tally to 11 since March 2022. An improving rate environment is a boon for insurers, especially long-tail insurers.

The industry has been witnessing continued improvement in price, though the magnitude has slowed down. Per Deloitte Insights, gross premiums are estimated to increase sixfold to $722 billion by 2030. According to the report, China and North America should account for more than two-thirds of the global market. Per Deloitte Insights, trends like commercial lines witnessing growth faster than personal lines and homeowners’ premiums improving better than personal auto are likely to continue in 2023. Per reports published in Carrier Management, direct premiums written across the P&Cbusiness in 2023 are estimated to grow double-digit.Better pricing ensures improved premiums and prudent claims payment.

However, catastrophes and non-life insurers’ profitability are inversely related. Colorado State University (CSU) expects an above-normal 2023 Atlantic hurricane season with 18 named storms. These include nine hurricanes and four major hurricanes. This year’s hurricane season could be about 130% of the average season per CSU. Nonetheless, prudent underwriting and solid reserve should help them withstand the blows.

Swiss Re estimated a global economic loss of $120 billion in the first half of 2023 from natural disasters, while insured losses were estimated to be about $50 billion. Per a report in the Insurance Journal, the combined net ratio in 2023 is estimated to be 102.2. Underwriting losses are expected to be primarily due to soft performance in personal lines, which, in turn, is driven by higher catastrophe losses per Insurance Information Institute and Milliman.

The insurance industry continues to witness accelerated digitalization. Players areinvesting heavily in technology to improve scale and efficiencies.

A sturdy capital position supports effective capital deployments like mergers and acquisitions, dividend hikes, special dividends and share buyback programs.

Notably, the insurance industry is currently undervalued. The price to book multiple, commonly used for valuing insurance stocks, is currently pegged at 1.4 compared with the S&P 500’s 5.85 and the sector’s 3.18.

Value Picks

Picking the right stocks for greater investment rewards might be an uphill task. With the help of our Zacks Stock Screener, we have identified the best bets.

We have shortlisted four stocks, with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) and an impressive Value Score of A or B. Each stock has witnessed positive estimate revision, reflecting analysts’ optimism about their prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Value Score identifies stocks that are undervalued. These value stocks have a long history of showing superior returns.

Bermuda-based AXIS Capital Holdings is a leading specialty insurer and global reinsurer aiming for leadership in specialty risks. Rate increases, increased new business opportunities and focus on driving growth in its most attractive linespoise the insurer for growth.  

AXS made 18 consecutive dividend raises at an eight-year CAGR (2015 – 2022) of 5.3% and boasts one of the highest dividend yields among its peers.

Estimates for its 2023 and 2024 bottom line have moved 2.8% and 1.5% north in the last 30 days. The Zacks Consensus Estimate for 2023 and 2024 earnings indicates an improvement of 44.8% and 10.7% year over year. The expected long-term earnings growth rate is pegged at 5%. The shares are currently trading at 1.05X price to book value.

Headquartered in Zurich, Switzerland, Chubb Limited is one of the world’s largest providers of property and casualty insurance and reinsurance and the largest publicly traded P&C insurer based on market capitalization. Improving pricing environment, new business growth, high renewal rates, focus on cyber insurance that has immense room for growth, efforts to capitalize on the potential of middle-market businesses, both domestic and international, with the traditional core package as well as a specialty productand effective capital management auger well for growth.

Chubb has hiked dividends for the last 30 straight years. The company’s current dividend yield of 1.73% was better than the industry average of 0.3%, making the stock attractive for yield-seeking investors.

Estimates for the 2023 and 2024 bottom line have moved north by 0.8% and 0.1% in the past 30 days. The Zacks Consensus Estimate for 2023 and 2024 earnings indicates an improvement of 19.3% and 9.2% year over year. The expected long-term earnings growth rate is pegged at 10%. Shares of CB are currently trading at 1.57X price to book value.

Headquarters in Fairfield, OH, Cincinnati Financial Corporation markets property and casualty insurance. Several growth initiatives and price increases, a vital performing Commercial Lines segment, a higher level of insured exposures, rate increase, agent-focused business model,consistent cash flow generation and favorable reserve release poise it well for growth.

CINF has a solid track of raising dividends in the last 62 years. Its dividend yield is better than the industry average.

The Zacks Consensus Estimatefor 2023 and 2024 earnings has moved 2.2% and 0.3% north in the past 30 days.  The consensus estimate for 2023 and 2024 earnings indicates an improvement of 12.2% and 17.7% year over year. It has a Growth Score of B. The expected long-term earnings growth rate is 17.7%, better than the industry average of 12.1%. The insurer has a favorable VGM Score of B. Shares are currently trading at 1.49X price to book value.

Headquartered in Santa Ana, CA., First American Financial serves homebuyers and sellers, real estate professionals, loan originators and servicers, commercial property professionals, homebuilders and others involved in residential and commercial property transactions with products and services specific to their needs.

Increased demand among millennials for first-time home purchases, improved rate environment, strength in commercial business and effective capital deployment augur well for growth.

The Zacks Consensus Estimatefor 2023 and 2024 earnings has moved 2.4% and 0.6% north in the last 30 days. Shares are currently trading at 1.32X price to book value.