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Catastrophe Loss to Impact Q1: 4 Insurance Outperformers

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In 2017, the insurance industry struggled to survive the wrath of an unprecedented hurricane activity which witnessed the landfall of Irma, Harvey and Maria besides the Mexico earthquakes and the California wildfires. These consecutive calamities resulted in a massive catastrophe loss, catapulting last year to one of the costliest periods ever in terms of such huge deficits. Per a report by Munich Re, overall catastrophe loss amounted to $330 billion with the insured losses coming in at $135 billion (less than half of the incurred losses).

The intensity and impact of such catastrophe events shook the insurance industry big time with the losses deeply denting its underwriting results and adversely affecting the insurers’ earnings.

The current year kick-started with the early January California mudslides, causing substantial damages to homes and businesses, and the northeast winter storms, which hit the East Coast on Jan 3 and Mar 1, 2018. In fact, among the property and casualty (P&C) insurers, Chubb Limited (CB - Free Report) has projected total catastrophe loss of $305 million, which are likely to affect the company’s first-quarter 2018 results. Losses from the California mudslides are anticipated at $125 million pretax while northeast winter storms will account for $195 million in loss.

Catastrophe Loss Impact: Still a Silver Lining in the Cloud?

Although the calendar year has just crossed its first quarter, we think that there is still no need for insurers to hit the panic button yet. Analysts from Morgan Stanley have estimated global Q1 insured catastrophe loss to range between $5 billion and $10 billion, which is noticeably below the historical average of $14 billion.

Per a report by Fitch Ratings, the insurance industry is expected to regain its substantial underwriting profitability in 2018, albeit at a slow pace. Moreover, combined ratios are likely to improve and might come close to break-even. Thus, insurance players can expect a better year in terms of catastrophe losses compared with the tumultuous journey in 2017.

Further, catastrophe and rough weather-related events are a necessary evil for P&C insurers to improve their pricing as they eventually reduce competition. Also, occurrence of natural disasters might lead to an accelerated rate of policy renewals.

Moreover, the industry has been strengthening its capital position with earnings growth and policyholders’ surpluses. Such solid liquidity profile will help insurers counter near-term volatility as well as the aftermath of adverse events.

Given the unpredictable nature of weather-oriented episodes, catastrophe loss will always remain a concern for the P&C insurers and we wait to see how they tackle pressure or buckle under it, as the year progresses.

On a positive front, better-than-expected underwriting results, a solid liquidity position and an evolving coverage opportunity should lend the P&C insurers enough support to grow.

Interestingly, the industry has outperformed the broader market in the first quarter, evident from a gain of 0.7% against the S&P 500’s decrease of 1.2%.



 

Outperformers in Q1

There is a possibility of the catastrophe loss severity negatively impacting the results of insurers from this space in the yet-to-be-reported quarter. However, we expect some insurers to deliver favorable results on the back of a few positive factors.

The increase in interest rate in March, which also marks the sixth increase post recession, reflects stability in the economy. Improving rate environment will aid investment income (forming a major portion of their revenues). Fed having promised two more rate hikes in 2018 alone, raises optimism.

Lower tax incidence, growing GDP and an improving employment scenario have supported insurers’ performance.

This apart, a bullish economic outlook (with the unemployment rate projected to grow at 3.8% in 2018 and the gross domestic product at 2.7%) is likely to add an impetus to the industry.

Thus, the aforementioned positives will probably cushion the following stocks to push the envelope and yield profits via an underlying strength and business modification.

With the help of our Zacks Stock Screener, we have boiled down to four stocks poised to beat earnings estimate despite all odds. Our parameters include a positive Earnings ESP, a favorable Zacks Rank and price outperformance compared with the industry in the first quarter. Also, these stocks deliver an average four-quarter positive surprise, highlighting operational excellence.

Cincinnati, OH-based American Financial Group, Inc. (AFG - Free Report) provides property and casualty insurance products in the United States. The Zacks Consensus Estimate for the first quarter is pegged at $1.94, reflecting year-over-year growth of 14.8%. The company holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, the company has an Earnings ESP of +2.40% and along with a bullish rank, it ideally comprises the right combination of two key ingredients to beat on earnings this quarter.

The company came up with positive surprises in the last four quarters with an average beat of 26.3%.

Additionally, the stock has gained 3.4% compared with the industry’s growth in the first quarter.


 

Headquartered in New York, The Travelers Companies, Inc. (TRV - Free Report) provides a range of commercial and personal property plus casualty insurance products and services to businesses, government units, associations as well as individuals in the United states and internationally. The Zacks Consensus Estimate for the first quarter is pegged at $2.77, representing a year-over-year rise of 28.2%.

Moreover, the company has an Earnings ESP of +0.58% and a Zacks Rank #3 (Hold), which consist of the right combination of elements to beat estimates this time around.

The company delivered positive surprises in the two of the last four quarters with an average beat of 43.1%.

Also, the stock has gained 2.4% compared with the industry’s increase in the first quarter.


 

Birmingham, AL-based Infinity Property and Casualty Corporation provides personal auto insurance products in the United States. The consensus mark for the period to be reported is pegged at $1.31, translating into a year-over-year surge of 40.9%. Additionally, the company has an Earnings ESP of +8.05% and a Zacks Rank of 3, indicative of the right combination of two key ingredients to surpass expectations this quarter.

The company delivered positive surprises in the three of the last four quarters with an average beat of 262.3%.

Moreover, the stock has climbed 11.7% compared with the industry’s gain in the first quarter.



New York-based National General Holdings Corp. (NGHC - Free Report) provides various insurance products and services in the United States. The consensus estimate for the to-be-reported quarter stands at $0.51, registering a year-over-year improvement of 34.2%. The company sports a solid Zacks Rank #1 (Strong Buy).

Also, the company’s Earnings ESP of +5.59% along with its solid Zacks Rank of 1 underlines the right combination of two key ingredients to outpace estimates this reporting cycle.

The company came up with positive surprises in the two of the last four quarters with an average beat of 11.5%.

Moreover, the stock has rallied 23.8% compared with the industry’s value in the first quarter.

 

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