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Hike in Commercial Insurance Rates is Good for These Stocks

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Leading global advisory, broking and solutions company Willis Towers Watson’ Commercial Lines Insurance Pricing Survey has revealed that Commercial insurance prices in the United States increased by nearly 3% year over year, during the second quarter of 2018. The survey found that price changes of this magnitude have not been reported in almost four years.  This marked the third consecutive quarter of rate hike.  

Commercial lines, which accounts for about half of U.S. property/casualty insurance industry premium, includes the many kinds of insurance products designed for businesses.  Commercial lines account for about 45% of the total insurance industry’s net premium written.

Per the findings, almost all the business lines — Commercial auto, Commercial property and excess/umbrella liability — of the Commercial Lines Insurance witnessed a solid price increase on a sequential basis. Commercial property price and Commercial auto continues saw price gains for the third consecutive quarter.

While the rates for Commercial property increased in the low-to-mid single digits, Commercial auto impressed with near double-digit rate gains.

In the first quarter of 2018, Commercial property & casualty (P&C) insurance rates rose by 1.7% on average across all-sized accounts.

The rate increase, which is seen now is a result of players’ response to catastrophe loss sustained in 2017, led them to hike premium to recover losses across the affected insurance lines. This is, however a welcome development after the industry saw soft market conditions in three years prior to 2017.

Better pricing should therefore help insurers meet claims without denting profitability.

Players also stand to gain from the increase in the fed funds’ rate, which affects insurers’ investment income. They invest a portion of the premiums they receive and thus a higher rate will boost investment income. Given the recovery in U.S. economy, the Fed has been active in raising interest rates that currently stand at 2% from the near-zero level, when the recession hit the economy hard. There have been seven hikes in rate since December 2015. Per the prevailing market speculation, there is a nearly 96% possibility for a rate hike in September 2018, followed by 60% chance of another raise in December 2018.

Thus the current operating environment looks favorable for the growth of companies having sizable market presence in Commercial insurance. These stocks are thus provide good investment options.

Property and Casualty  insurance industry is currently ranked #114, representing the top 45% of the Zacks Industry Rank.

In a year’s time the Zacks Property and Casualty industry has gained 16.4% compared with the gain of 15.8% in a year’s time.

Chubb Limited (CB - Free Report) with a Zacks Rank #3 is one of the leading players in Commercial insurance that has been witnessing an increase in overall rates for Commercial P&C pricing. It has also been experiencing increase in renewal retention ratio. These trends should favor the company’s top-line growth.

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

The company’s Zacks Consensus Estimate for current-year earnings of $10.41 per share translates into year-over-year growth of 29.6%.

The Travelers Companies, Inc.’s (TRV - Free Report) auto business saw the highest level of rate increases. The company is executing its pricing strategy on account-by-account and class-by-class basis, pursuing attractive new business opportunities.

The stock’s carries a Zacks Rank # 3. Its Zacks Consensus Estimate for current-year earnings of $9.95 per share translates into year-over-growth of 36.7%.

The Allstate Corp. (ALL - Free Report) with a Zacks Rank #2 (Buy) has seen its property and liability segment performing strongly driven by pricing gains and strong underwriting. An overall increase in rates should further lead to premium growth.

The stock’s Zacks Consensus Estimate for current-year earnings of $9.44 per share translates into year-over-year growth of 40.7%.The stock has lost 7%.

Berkshire Hathaway Inc. (BRK.B - Free Report) with a Zacks Rank #2, provides specialized commercial insurance via its subsidiary GEICO. In the first half of 2018, the company reported net underwriting gain from its insurance operations, reversing the year-ago loss. This was achieved on the back of pricing gains as well as underwriting discipline.

The stock’s Zacks Consensus Estimate for current-year earnings of $9.90 per share translates into year-over-growth of 69%.

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