The current economic backdrop is shaping up well for insurers as they are witnessing gradual improvement in interest rates along with substantially lower level of catastrophe loss and reduced tax (owing to a noteworthy tax reform effective Jan 1, 2018). These factors have also led to a promising performance in the first quarter of 2018 and augur well for an encouraging second quarter. Hence, we expect the insurance industry to continue with the momentum and deliver a better-than-expected show as the year progresses.
However, concerning factors like weather-related events, political turmoil and regulatory uncertainty have posed challenges to the insurance industry, which nevertheless, maintained its focus on achieving two important objectives — the top-line sales growth while bolstering bottom-line profitability. Therefore, despite the aforementioned headwinds, we expect some insurers to generate desirable results and keep the optimism alive among investors on the stock.
Pertaining to the interest rate environment, continued improvement in the interest rates has proved to be beneficial for insurers, reflecting stability in the U.S. economy at the same time. The FOMC meeting on Jun 13, 2018 marked the second interest rate hike so far this year, which further cemented insurers’ confidence in the regulatory body’s promise to deliver a fourth rate raise this year and three more in 2019 (exceeding the previously announced limit of two hikes). The recent growth announced at the meeting has put the current interest rate in the 1.75-2% range.
An advancing rate environment will ultimately profit the insurance industry with regard to its players’ investment income (a component of their revenues), thereby adding to their overall top line. For instance, the life insurance companies will be relieved of the operating pressures, induced by tight credit spreads that the low-rate environment has exerted for a considerable period of time. Moreover, 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.
Speaking of underwriting performance, 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 devastating hurricane activity and earthquakes in 2017.
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. Hence, the occurrence of catastrophe loss is not likely to be a huge drag for the insurance industry, which is hopeful about its underwriting performance in the to-be-reported quarter. Moreover, insurers have likely witnessed a noticeable rise in combined ratios, which might inch close to a break-even point as the year moves ahead.
Notably, capital strength displayed by insurers will assist them to offset a near-term volatility and the effects of adversities.
Additionally, mergers and acquisitions have recently grabbed headlines as an important trend to look out for in 2018. The last couple of years has prepared insurers to take an aggressive and positive stance toward the deal-making environment in 2018, mainly driven by an evolving industry and M&A environment. Hence, this trend is expected to add more fuel to the already upbeat performance of the insurance industry.
There are also other factors which have aided results in the last reported quarter and are likely to repeat this quarter to be reported too. 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 fell just below the Federal Reserve’s 2% target.
This apart, a recovering housing market looks geared up to enhance insurable exposures and premiums written.
Moreover, the tax cut, slashing the tax rate to 21% from 35%, proved to be an attractive option for most corporates including insurers as it helped driving the companies’ bottom-line, boosting margins directly.
A sturdy financial position, attributable to continued capital inflow into the industry, will not only back insurers to counter a near-term instability as well as the impact of unfavorable occurrences but will also keep the industry’s growth trend active.
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 further for yielding profits via an underlying strength and business streamlining.
We have zeroed in on three stocks that have had a bull run despite all odds. These stocks also carry a VGM Score of A. We expect these best bets to deliver an impressive performance given northbound estimate revisions, a solid Zacks Rank and share price outperformance on year-to-date basis. 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 best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 7.7% upward to $4.22 over the last 60 days. This is also reflected through the company’s Zacks Rank of 1.
The stock has gained 4.2% versus the industry’s decrease of 3.2%.
New York-based National General Holdings Corp. (NGHC - Free Report) provides various insurance products and services in the United States. The stock has seen the Zacks Consensus Estimate for 2018 bottom line being moved 1.8% north to $2.28 over the last 60 days. This is also represented by the company’s Zacks Rank #2.
The stock has rallied 38% against the industry’s decline of 3.2%.
Headquartered in Birmingham, MI, Conifer Holdings, Inc. (CNFR - Free Report) provides insurance coverage in specialty commercial and personal product lines. The stock has seen the consensus mark for current-year earnings being raised 26.3% to 48 cents over the last 60 days. This is also indicated by the company’s Zacks Rank of 2.
The stock has gained 12.1% against the industry’s decline of 3.3%.
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