Zacks Industry Outlook Highlights: Aspen Insurance Holdings, Heritage Insurance Holdings, Infinity Property and Casualty and Argo Group International Holdings
For Immediate Release
Chicago, IL – April 26, 2017 – Today, Zacks Equity Research discusses the Industry: Insurance, Part 2, including Aspen Insurance Holdings Ltd. (NYSE: AHL – Free Report ), Heritage Insurance Holdings, Inc. (NYSE: HRTG – Free Report ), Infinity Property and Casualty Corp. (NASDAQ:IPCC – Free Report ) and Argo Group International Holdings, Ltd. (NASDAQ: AGII – Free Report ).
Industry: Insurance, Part 2
Link: https://www.zacks.com/commentary/111446/pc-insurers-lack-impetus-interest-rate-hike-not-enough
Both rising interest rates and improving economic health that convinced the Fed to take such a move will likely contribute to P&C insurers’ business growth, but these may not be enough for the industry to counter the inherent headwinds and thrive. Perhaps this evaluation, along with lack of confidence in the effectiveness of the Trump administration on the overall financial sector, is keeping investors away from betting on the P&C insurance space.
This is clearly evident from the Zacks classified P&C Insurance Industry’s 5.3% loss versus the S&P 500’s decline of 1.8% since the Fed’s latest rate hike on Mar 15.
The dominating concerns are lack of pricing power and a low-yield investment environment. Persistent market softening is evident in both commercial and personal lines.
On the other hand, an improving job market and increasing disposable income should lead to more car and home purchases and thus increase insurable exposure. However, the rising rate environment may offset this growth by making these less affordable.
In any case, some major adjustments to their business in order to compensate for the damage caused by the prolonged low interest rate environment will continue helping P&C insurers to improve their bottom lines.
Zacks Industry Rank Indicates Gloomy Performance Ahead
This 48-company group currently carries a Zacks Industry Rank of #167, which places it at the bottom 35% of the 250-plus Zacks classified industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Why Rising Interest Rates May Not Brace P&C Insurers
P&C insurers are less sensitive to interest rates than life insurers. That’s because the large financial portfolios managed by these carriers are designed to be fairly conservative. Meaning, they keep the required fund in hand to cover claims that they typically face faster than life insurers. Due to this, they depend significantly on short-term Treasury bills.
For P&C insurers, the interest rate sensitivity has both positive and negative directions. Whether the upside offsets the downside is yet to be seen, as there hasn’t been any measurable progress on the rate hike front so far.
A rising rate environment would boost P&C insurers’ investment income that has been declining in an extended low-rate environment. However, the key downside is a significant amount of bonds in P&C insurers’ portfolio losing value if rates are hiked steadily and handsomely (which is unlikely, though).
P&C insurers’ extreme sensitivity to asset inflation will aggravate the situation. In other words, the value of the properties insured by carriers will appreciate with an improving real estate market, increasing their potential liabilities from claims. This may outpace the rising yields on bonds they added to their portfolios for covering the claims. In fact, the bonds in their portfolios will lose value with rising interest rates and could ultimately result in capital volatility.
Addressing this concern would require P&C insurers to add more risky assets to their investment portfolios to meet the rising liabilities from claims. This would eventually increase their costs.
Continued Market Softening to Hurt Profitability
Looking beyond the implications of the slow and modest interest rate hike, it is market softening that characterizes the P&C insurance industry. In order to retain renewals and secure new business, carriers are aggressively reducing rates and making the market buyer-friendly.
The softening was evident right through 2015 and has continued so far. Pricing primarily remains soft in the areas of commercial property, workers' compensation, general liability and business interruption.
By its very nature, a soft market causes lower underwriting profitability for carriers, as they prioritize market share gain over making more from premiums to survive.
While greater demand for insurance (particularly with the emergence new insurable risks including cyber threat) will keep the business of P&C insurers afloat, their willingness to negotiate on policy terms and enhanced capital strength will intensify the competition for market share in the quarters ahead.
Growth Albeit Slow, Should Continue
In addition to the continuation of a soft market environment, slowing reinsurance renewals across most lines due to moderate catastrophe in recent years should curb P&C insurers’ bottom-line growth.
However, ample underwriting capacity, a strong liquidity profile and evolving coverage opportunity should help these carriers keep growing.
Concerns related to weak capital levels are now things of the past, as the industry’s capital position has been building up with earnings growth and policyholders' surpluses. The industry has also been witnessing continued inflow of alternative capital (which is one of the reasons for market softening).
Further, better preparation to withstand catastrophe losses should translate into higher underwriting profits and a lower combined ratio in the upcoming quarters.
As P&C insurers hold about two-thirds of their invested assets in the form of bonds, their capacity is highly sensitive to changes in credit market conditions. With the credit market showing resilience and almost no possibility of a sudden spike in interest rates, insurers are likely to incur lesser realized and unrealized capital losses in the quarters ahead.
Competition is cropping up both within the primary lines of the P&C space and with reinsurers’ expansion. However, we expect proactive transformational measures, including the adoption of technology solutions, to bring competitive advantages.
Also, for more enthusiasm in renewals and to meet evolving demands of policyholders, insurers are in the process of product reframing and innovation. This should help them expand their customer base for products that will offer higher margins.
The emerging risks related to cyber threats are also giving P&C insurers scope to capitalize on. This segment, though relatively small in size, has been witnessing continued growth in premium and policy count.
How to Play the Industry
The absence of any significant help from the rising rate environment and the likely continuation of the buyers’ market will hold insurers back from flourishing in the near term. In fact, stiff competition and reducing premium rates may pose significant challenges to bottom-line growth for some carriers. As such, dodging stocks with an unfavorable Zacks Rank should be the right strategy.
We strongly suggest staying away from or getting rid of the following bottom-ranked stocks:
Aspen Insurance Holdings Ltd. (NYSE:AHL – Free Report ) : This Zacks Rank #5 (Strong Sell) stock gained only 3.3% over the last six months versus the S&P 500’s gain of 8.9%. The stock’s Zacks Consensus Estimate for the current year revised 18.5% downward over the last 60 days.
Heritage Insurance Holdings, Inc. (NYSE:HRTG – Free Report ) : A 31.6% downward revision in the Zacks Consensus Estimate for the current year over the last 60 days precipitated a Zacks Rank #5 for this stock. The stock lost 4.7% over the last six months.
However, as there are some reasons to be optimistic about P&C insurers’ growth potential, buying some stocks from the space based on a favorable Zacks Rank would be a prudent decision now.
Here are a couple of top-ranked P&C insurance stocks you may want to consider:
Infinity Property and Casualty Corp. (NASDAQ:IPCC – Free Report ) : This Zacks Rank #1 (Strong Buy) stock gained 18.4% over the last six months. The stock’s Zacks Consensus Estimate for the current year revised 10% upward over the last 60 days.
Argo Group International Holdings, Ltd. (NASDAQ:AGII – Free Report ) : A 5% upward revision the Zacks Consensus Estimate for the current year over the last 60 days lead to a Zacks Rank #1 for this stock. The price of this stock surged over 16% over the last six months.
Check out our latest U.S. Insurance Industry Outlook for more on the current state of affairs in the overall insurance market.
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Aspen Insurance Holdings Limited (AHL): Free Stock Analysis Report
Heritage Insurance Holdings, Inc. (HRTG): Free Stock Analysis Report
Infinity Property and Casualty Corporation (IPCC): Free Stock Analysis Report
Argo Group International Holdings, Ltd. (AGII): Free Stock Analysis Report
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