Zacks Industry Outlook Highlights: United Insurance Holdings, ING Groep, Old Republic International and Navigators Group - Press Releases

For Immediate Release

Chicago, IL – May 08, 2015 – Today, Zacks Equity Research discusses the Insurance, including United Insurance Holdings Corp. (UIHC), ING Groep N.V. (ING), Old Republic International Corp. (ORI) and Navigators Group Inc. ( NAVG).

Industry: Insurance

Link: https://www.zacks.com/commentary/45345/insurance-stock-outlook---may-2015

U.S. Insurers: Dim Possibility of a Quick Recovery

After a period of stability in premium rate hike, the U.S. insurance market has yet again softened. Weakness in some macro factors and almost muted economic growth in the first three months of the year have cropped up as serious threats to the recovery in this industry.

And if these aren’t enough, renewed uncertainty over an interest rate hike -- the key growth driver of insurers owing to the proportionate reactivity of their investment income -- has cast a pall over the optimism with which the year had unfolded.

The possibility of an interest rate hike still hangs in the balance with the Federal Open Market Committee removing any previous hint on this matter. And as the interest rate environment is unlikely to reverse in the near term, returning to a favorable premium rate environment seems unlikely.

Overall, lack of consistency in economic growth, fundamental challenges -- such as weak underwriting gains and low investment yields -- and heightened competition can curb insurers’ profitability in the quarters ahead.

On the other hand, a strong liquidity profile by virtue of continued capital inflow into the industry, ample capacity, conservative product design and evolving coverage cannot only limit any downside but also keep the growth trend alive.

One of the segments enjoying a steady influx of capital is cyber insurance. This space has emerged as a winner with the fastest growth logged in the industry over the last few quarters.

Also, the ongoing reserve development will continue to support insurers’ financials. Moreover, increasing demand from the economically recuperating American households should place insurers in a favorable pricing cycle.

A lot depends on catastrophe losses, too. Following two below-normal seasons in a row, the 2015 Atlantic hurricane season, spanning from Jun 1 to Nov 30, is again expected to keep catastrophe losses modest. This should lead to a recovery in underwriting and a lower combined ratio for Property & Casualty (P&C) insurers. On the other hand, the possibility of lower catastrophe losses indicates lower premium rates.

Regulation: Boon or Bane?

Apparently, a safe and sleepy business nature keeps U.S. insurers out of federal regulations, which could have marred business expansion. But the industry is yet to be strongly braced by the advantages of operating under state-run regulations. Instead, decentralized regulation and consumer protection make the industry susceptible to insolvency.

Now, the changing nature of business -- more like banks in terms of liabilities -- perhaps calls for a federal oversight. Though the necessity for a regulatory revamp has been strongly felt after witnessing the success of banks, this will delve another blow to the wobbling industry.

A provision of the 2010 Dodd-Frank Act requires setting minimum capital and leverage standards on insurance companies as well, but these are yet to be implemented by U.S. lawmakers, who are considering the distinct business fundamentals unlike banks. But the industry, which accounts for 7% of GDP in terms of insurance premiums paid each year, has a fat chance of being relieved of the Federal Reserve control for long.

Zacks Industry Rank

Within the Zacks Industry classification, insurers are broadly grouped in the Finance sector (one of 16 Zacks sectors) and are further sub-divided into five industries at the expanded level: P&C, Multiline, Accident & Health, Life and Brokers. The level of sensitivity and exposure to different stages of the economic cycle vary for each industry.

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank .

As a guideline, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for both Brokers and Property & Casualty is #105, Life is #151, Multiline is #187, Accident & Health is #216. So the outlook of the overall industry is ‘Neutral’ to 'Negative.'

Earnings Trends

As of the end of last month, 65.1% the S&P 500 companies in the broader Finance sector, of which the Insurance industry is a medium level (or M-level) component, have reported first-quarter 2015 results. The earnings beat ratio (percentage of companies coming out with positive surprises) is 59.3%, while the revenue beat ratio is 42.6%.

The sector is expected to witness year-over-year earnings growth of 17.4% compared with a 1% decline recorded in the prior quarter. Revenues are also expected to show an improvement by registering a lower year-over-year decline compared to the previous quarter. The sector is expected to see a revenue decline of 1.5% compared with the prior quarter’s decline of 13.2%.

For a detailed look at the earnings trend for this sector and others, please read our latest Earnings Trends report.

Bottom Line

Looking at the broader trends, the overall health of the industry appears to have deteriorated. However, learning from past experience, insurers are now resorting to expense saving measures to tread water.

If insurers manage to overcome the short-term resistance that may be holding back premium rate increase, they should ultimately witness margin expansion. Also, in the absence of federal regulation, insurers can take on new challenges with the ample capital that they now have.

How to Play the Insurance Sector

As you can see, there are plenty of reasons to worry about the industry’s near-term prospects. So, it would be prudent to stay away from a few insurance stocks that might disappoint in the near term. We suggest staying away from or get rid of the Zacks Rank #5 (Strong Sell) stocks such as United Insurance Holdings Corp. (UIHC) and ING Groep N.V. ( ING).

However, one could grab the opportunity to invest in a few fundamentally strong stocks at a reasonable price. We highly recommend stocks with the Zacks Rank #1 (Strong Buy) such as Old Republic International Corp. (ORI) and Navigators Group Inc. (NAVG).

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UTD INSURANCE (UIHC): Free Stock Analysis Report
 
ING GROEP-ADR (ING): Free Stock Analysis Report
 
OLD REP INTL (ORI): Free Stock Analysis Report
 
NAVIGATORS GRP (NAVG): Free Stock Analysis Report
 
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