The insurance industry like any other industry is facing operational challenges due to the coronavirus pandemic. Though effects of the pandemic, absence of interest rate hike, trade tariffs and inflation rate are expected to result in volatility in the second half as well, the insurance industry is expected to push the boundaries.
Factors Likely to Impact Insurers in 2H Cat Environment The second half of the year includes the hurricane season that weighs on the profits of insurers. In 2019, Hurricane Dorian, Tropical Storm Imelda, Typhoons Hagibis and Faxai in Japan and Typhoon Lekima in China dragged down underwriting profitability. Per Colorado State University, the last year saw near average Atlantic hurricane season and hurricane activity was about 120% of the average season. Per Munich RE, catastrophe losses in 2019 amounted to $150 billion, of which a bit more than one third (about $52 billion) was insured. Colorado State University estimates ‘very active Atlantic hurricane season in 2020 and hurricane activity will be about 150% of the average season.’ Per a report on Jun 4, 2020, it predicted 19 named storms this hurricane season that runs from Jun 1 to Nov 30, including 13 hurricanes, of which four could be major hurricanes. Nonetheless, insurers’ prudent underwriting, favorable reserve development and sturdy capital level should help withstand the blow. Per American Property Casualty Insurance Association and Verisk, private U.S. property/casualty insurers’ profitability (measured by annualized rate of return on average policyholders’ surplus) was 7.7% in 2019. Industry surplus moved up to a record $847.8 billion at 2019 end from $742.2 billion as of Dec 31, 2018. Net underwriting gains of $3.7 billion in 2019 reversed $0.2 billion of net underwriting losses in 2018. Combined ratio improved 30 basis points to 98.9% on a year-over-year basis. Pricing Continues to Firm Up Catastrophic occurrences weigh on insurers’ underwriting profitability. Nonetheless, price hikes by industry players should help them stay afloat. In the first quarter of 2020, Commercial insurance pricing improved 14%, property rates increased 21%, casualty pricing rose 5%, U.S. financial and professional lines pricing increased 23%, Cyber insurance pricing rose 6%, and Auto pricing was up 10%, per Marsh LLC in a report published in Business insurance. Further Marsh noted that the COVID-19 outbreak ‘had an insignificant impact on pricing in the first quarter’ but will have a greater impact on pricing in the remainder of 2020. Portfolio repositioning and reinsurance covers should help insurers withstand the deficits. Interest Rate The Federal Reserve decided to keep interest rate unchanged within its target range of 20-0.25%, in the wake of the COVID-19 outbreak, which continues to weigh on economic activity, employment and inflation in the near term. In fact, the Fed might not raise rate until 2023. A near-zero interest rate is a concern especially for long-tail Property and Casualty Insurance providers and Life insurers (whose earnings are typically derived from the spread between their investment returns and what they credit as interest on insurance policies and products). Adoption of Technology Greater use of technology like blockchain, AI, advanced analytics, telematics, cloud computing and robotic process automation should help insurers in seamless underwriting and claims processing amid the pandemic, which has necessitated social distancing and remote working apart from expediting business operations and saving costs. However, slowdown in economic growth might weigh on new sales and insurable exposures. Price Performance Year to date, the insurance industry has declined 22.2% compared with the S&P 500 composite’s decline of 5.1% and the Finance sector’s decrease of 22.1%.
Stocks to Add to Your Portfolio With the help of the Zacks Stock Screener, we have shortlisted five insurance stocks with a favorable Zacks Rank, supported by upward estimate revisions over the past 30 days, and an impressive Value Score of A or B. Value Score helps identify companies that are undervalued. The deviation from their fair value is what creates an exceptional upside opportunity. Also, back-tested results have shown that stocks with a favorable Style Score of A or B coupled with a solid Zacks Rank are the best investment bets. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Chicago, IL, CNA Financial Corporation ( CNA Quick Quote CNA - Free Report) provides commercial property and casualty insurance products primarily in the United States. Zacks Rank #2 (Buy) Value Score of A The expected long-term earnings growth rate is pegged at 5%. Marietta, PA, CA-based Donegal Group Inc. ( DGICA Quick Quote DGICA - Free Report) provides personal and commercial lines of property and casualty insurance to businesses and individuals in the Mid-Atlantic, Midwestern, New England, and southern states. Zacks Rank #1 The Zacks Consensus Estimate for 2020 bottom line has increased 13.6% in the past 60 days. Value Score of B The consensus estimate for current-year earnings implies a 23.8% year-over-year increase. Springfield, IL based Horace Mann Educators Corporation ( HMN Quick Quote HMN - Free Report) together with its subsidiaries, operates as a multiline insurance company in the United States. Zacks Rank #2 The Zacks Consensus Estimate for 2020 bottom line has increased 1.9% in the last 60 days. Value Score of A The consensus estimate for current-year earnings suggests a 25% year-over-year increase. Milwaukee, WI-based MGIC Investment Corporation ( MTG Quick Quote MTG - Free Report) provides private mortgage insurance, other mortgage credit risk management solutions, and ancillary services to lenders and government sponsored entities in the United States, Puerto Rico, and Guam. Zacks Rank #2 Value Score of A The expected long-term earnings growth rate is pegged at 5%. Chicago, IL-based Old Republic International Corporation ( ORI Quick Quote ORI - Free Report) engages in insurance underwriting and related services business, primarily in the United States and Canada. Zacks Rank #1 The Zacks Consensus Estimate for 2020 bottom line has increased 50.5% in the last 60 days. Value Score of B Looking for Stocks with Skyrocketing Upside? Zacks has just released a Special Report on the booming investment opportunities of legal marijuana. Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look. See the pot trades we're targeting>>