The performance of property and casualty (P&C) insurers largely depends on the occurrence of catastrophic events. Underwriting profit, characterizing P&C insurers’ profitability, is the difference between premiums collected on insurance policies and expenses incurred and claims paid. Thus, lower the magnitude of cat losses, better the underwriting profit.
The insurance industry, through the first nine months of 2018, incurred cat losses stemming from California mudslide, northeast winter storms, rain storms in the United States and Canada hurricanes Florence and Lane, Typhoon Jebi among others, which dented underwriting profitability.
There have also been some catastrophic events in the fourth quarter so far. Camp Fire in Butte County, CA that broke out in mid-November is said to be the deadliest wildfire in history, per CalFire. This apart, Hill Fire in Ventura County, Nurse Fire in Solano County and Woolsey Fire in southern California also caused much damage. Catastrophe modeler Risk Management Solutions recently estimated insured losses from Camp Fire between $7.5 billion to $10 billion and between $1.5 billion and $3 billion from the Woolsey Fire.
Besides, Hurricane Michael is expected to take a toll on insurers in the fourth quarter. Insurer RLI Corp. (RLI - Free Report) estimates cat loss between $22 million and $27 million, net of reinsurance while AXIS Capital Holdings Limited (AXS - Free Report) expects preliminary cat loss between $100 million and $120 million, net of estimated recoveries from reinsurance and retrocessional covers and including the impact of estimated reinstatement premiums for fourth-quarter 2018.
Despite catastrophe losses, there are catalysts that should help insures post solid numbers in the fourth quarter. After witnessing 19 back-to-back quarters of soft pricing market, insurers started to increase prices from the fourth quarter of 2017. Per excerpts from Insurance Marketplace Realities by Willis Towers Watson, property insurance rates in 2018 are estimated to rise 20-25% for catastrophe-exposed risks with recent losses. Also, reinsurance covers should help insurers limit magnitude of losses.
This apart, capital reserve, built by insurers owing to a not-so-active catastrophe environment in the past, is helping companies meet insurance claims. Per ISO and the Property Casualty Insurers Association of America, private U.S. P&C insurers saw investment gains push the industry’s surplus to an all-time high of $752.5 billion in 2017, up 7.4% year over year.
An improving rate environment has been aiding the investment income of insurers. With three hikes already implemented this year so far, interest rate currently stands at 2.25%. Post the FOMC meeting in November, investors expect Fed to hike rate by another 25 bps in its December meeting that would lead to four hikes in 2018 with expectation of three in 2019 and two in 2020.
The industry has outperformed the Zacks S&P 500 Composite index year to date. While the industry has clocked a gain of 2.9%, the index has lost 0.9%.
Strategic initiatives to achieve a diversified portfolio and, mergers and consolidation to accelerate growth, expand globally and add capabilities position insurers well.
Stocks in Focus
Banking on prudent underwriting and core strength, the bottom line of several insurers beat estimates. We have zeroed in on four property and casualty insurers that were not only outperformers in the last three quarters but have the potential to deliver solid fourth-quarter results as well.
Berkshire Hathaway Inc. (BRK.B - Free Report) engages primarily in insurance along with freight rail transportation and utility businesses. The company delivered average positive surprise of 13.66% in the last three quarters. The Zacks Consensus Estimate for 2018 has moved up 1.4% while the same for 2019 increased nearly 3% in the past 30 days. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Shares of Berkshire Hathaway have gained 6.4% year to date, outperforming the industry as well the Zacks S&P 500 composite index.
W. R. Berkley Corporation (WRB - Free Report) operates as a commercial lines writer in the United States and internationally. The company delivered average positive surprise of 22.26% in the last three quarters. The Zacks Consensus Estimate for 2018 has moved up 8.7% while the same for 2019 increased 1.9% in the past 30 days. The stock carries a Zacks Rank #2.
Shares of W. R. Berkley have gained 8.8% year to date, outperforming the industry as well as the Zacks S&P 500 composite.
National General Holdings Corp. (NGHC - Free Report) , a specialty personal lines insurance holding company, provides various insurance products and services in the United States. The company delivered average positive surprise of 35.08% in the last three quarters. The Zacks Consensus Estimate for 2018 has moved up 6.8% while the same for 2019 increased 4.8% in the past 30 days. The stock carries Zacks Rank #3 (Hold).
Shares of National General Holdings have rallied 30.4% year to date, outperforming the industry as well as the Zacks S&P 500 composite.
NMI Holdings Inc. (NMIH - Free Report) provides private mortgage guaranty insurance services in the United States. The company delivered average positive surprise of 19.78% in the last three quarters. The Zacks Consensus Estimate for 2018 has moved up 13.2% while the same for 2019 increased 2.5% in the past 30 days. The stock carries a Zacks Rank #3.
Shares of NMI Holdings have gained 11.7% year to date, outperforming the industry as well as the Zacks S&P 500 composite.
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