Gradual improvement in interest rates, substantially lower level of catastrophe loss, reduced tax (owing to a noteworthy tax reform effective Jan 1, 2018) and improving economy have resulted in a favorable first half performance and set the tone for an encouraging second half. We expect the insurance industry to continue with the momentum and deliver a better-than-expected show as the year progresses.
Notably, insurers battled against the challenges faced during the first half, while remaining focused on achieving two important objectives, which are top-line sales growth while bolstering bottom-line profitability.
Concerning factors like weather-related events and political turmoil are beyond any insurer’s control. Despite such trials, we expect some insurers to generate desirable results and keep the optimism alive among investors on the stock.
Let us talk about a few driving factors that have paved the way for insurers to perform well in the first half, allaying apprehensions among stockholders.
Rising Interest Rates: A Boon for Insurers?
The gradually increasing interest rates have been a blessing for insurers, who are major beneficiaries of the climbing interest rates. The FOMC meeting on Jun 13, 2018 marked the second interest rate hike so far this year, which further strengthened insurers’ confidence in the regulatory body’s promise to deliver four rate raises in 2018. The recent growth announced at the meeting has put the current interest rate in the 1.75-2% range.
The June meeting also highlighted the seventh straight rate hike since late 2015, the period when the Fed initiated the procedure of raising interest rates from an almost zero level. With the Central Bank adopting a somewhat aggressive stance toward increasing interest rates, we can expect it to deliver its promise of a fourth rate raise this year and three more in 2019 (exceeding the previously announced limit of two hikes).
An advancing rate environment will ultimately benefit the insurance industry with regard to insurers’ investment income (a component of their revenues), thereby accelerating adding to the overall top line. For instance, the life insurance companies will be relieved of the operating pressures, resulting from tight credit spreads that the low-rate environment has exerted for a considerable period of time. Rising interest rates as well as increase in bond yields will provide the required breather for insurers to maintain decent margins.
Amid the improving interest rate environment, the property and casualty (P&C) insurers will also gain traction from a broader invested asset base and alternative asset classes.
Will Favorable Underwriting Performance Buoy Optimism?
California mudslides, northeast winter storms and a couple of severe wind and hail events, which mainly affected Mid-Atlantic, Northeast and certain Midwest states, have impacted the results during the first half of 2018. With The Allstate Corporation (ALL - Free Report) projecting a total catastrophe loss of $387 million after tax for the months of April and May 2018, the insurance industry players are not expecting a huge impact on their underwriting results. Thus, the positivity surrounding a better underwriting performance remains intact despite such massive inclement weather-oriented losses being incurred.
In fact, per a Fitch Ratings report, the insurance space is expected to regain substantial underwriting profitability in 2018, albeit at a slower pace after being badly hit by the unprecedented hurricane activity and earthquakes in 2017. Moreover, insurers have likely witnessed a noticeable improvement in combined ratios, which might come close to a break-even point as the year goes on.
Capital strength displayed by insurers will in turn assist them to counter a near-term volatility and the effects of adversities.
Other High Points for a Winning Performance
There are a few other factors that have bolstered the insurance industry in the first half of 2018. Notably, the unemployment rate in May 2018 came in at 3.8% (the lowest since 2000 and 1969) with the gross domestic product estimated to grow 2.7% (an increase from the earlier estimate of 2.5%). Further, the inflation came in just below the Federal Reserve’s 2% target.
This apart, a recovering housing market looks set to enhance insurable exposures and premiums written.
Moreover, the tax cut, which slashed the tax rate to 21% from 35%, proved to be an attractive option for most corporates including insurers, as it helped aiding the companies’ bottom-line, boosting margins directly.
A strong liquidity profile, attributable to continued capital inflow into the industry, will not only back insurers to counter a near-term volatility and the impact of hostile occurrences but will also keep the industry’s growth trend alive.
Outperformers in 1H
Despite a slew of headwinds posing a threat to insurers this year, tailwinds like the positive interest rate environment, better underwriting results and a steadily thriving economy have likely cushioned the following stocks to push the envelope and yield profits through an underlying strength and business modification.
We have zeroed in on three stocks that have had a bull run despite all odds. We expect these best bets to deliver a consistent performance given northbound estimate revisions, a solid Zacks Rank and an impressive VGM Score of A or B. Our research shows that stocks with a commendable VGM Score of A or B when combined with a bullish Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the top investment opportunities.
Mayfield Village, OH-based The Progressive Corporation (PGR - Free Report) provides personal and commercial auto insurance, residential property insurance plus other specialty property-casualty insurance and related services, primarily in the United States. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 7.4% upward to $4.21 over the last 60 days. This is also reflected through the company’s Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The stock has a VGM Score of B and has gained 5% versus the industry’s decrease of 5.4% in the first half of 2018.
Pembroke, Bermuda-based Argo Group International Holdings, Ltd. (ARGO - Free Report) underwrites specialty insurance and reinsurance products in the property and casualty markets. The stock has seen the Zacks Consensus Estimate for current-year bottom line being revised 5.7% upward to $3.73 over the last 60 days. This supports the company’s sturdy Zacks Rank #1.
The stock has a decent VGM Score of B and has gained 8.4% against the industry's decrease of 5.5% in the first half.
Headquartered in Daytona Beach, FL, Brown & Brown, Inc. (BRO - Free Report) markets and sells insurance products in the United States, England, Canada, Bermuda and the Cayman Islands. The stock has seen the Zacks Consensus Estimate for current-year earnings being moved 0.8% north to $1.23 over the last 60 days. This is substantiated by the company’s Zacks Rank #2.
The stock has a VGM Score of B and has grown 7.7% outperforming the industry’s rise of 3.1% in the first half.
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