The property and casualty (P&C) insurers fared well in the fourth quarter of 2018 on the back of prudent underwriting, strong reserves, better pricing, expenses management and effective capital deployment. However, devastation caused by California wildfires and Hurricane Michael took a toll on insurers’ profits in the quarter.
The first quarter of 2019 looks promising, largely because there have not been any major catastrophic events. Profitability of property and casualty insurers are measured by underwriting profit — 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.
Notably, after 19 quarters of soft pricing market, insurers have been gaining strength since the fourth quarter of 2017. Per excerpts from Insurance Marketplace Realities 2019 by Willis Towers Watson, rates are expected to increase in low single-digit to low double-digit range across most insurance lines in 2019, except for U.S. workers compensation and international liability programs. Also, reinsurance covers should help insurers limit the magnitude of losses.
Further, an improving rate environment is beneficial for investment income of insurers. While there has been an accelerated pace in rate hikes in the last couple of years, in its last FOMC meeting the Fed took a cautious stance. The central bank may not raise any rates in 2019 against its earlier expectation of two raises. This is likely because of slowing economic growth and sluggish inflation. Nevertheless, the interest rate now stands at 2.50% from a near-zero level post the 2008 financial crisis. Hence, net investment income, an important component of insurers’ top line, should benefit from an improved rate environment.
This apart, capital reserves, built by insurers owing to a not-so-active catastrophe environment in the past, is helping companies meet insurance claims without hampering profitability greatly.
Moreover, adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain should help insurers curb operational costs. Insurers, thus, are expected to continue making investment in technological platforms.
The industry has underperformed the Zacks S&P 500 Composite index year to date. While the industry has declined 0.1%, the index has gained 9.7%.
Nonetheless, strategic initiatives to achieve a diversified portfolio along with mergers and consolidation to accelerate growth, expand globally and add capabilities, position insurers well.
Stocks in Focus
Banking on prudent underwriting, core strength and favorable macro backdrop, we expect insurers to outperform in the first quarter of 2019. We have zeroed in on four P&C insurers that were not only outperformers in the last four quarters but have the potential to deliver solid first-quarter results as well.
Hallmark Financial Services, Inc. HALL underwrites, markets, distributes, and services property/casualty insurance products to businesses and individuals in the United States. The company delivered average positive surprise of 91.28% in the last four quarters. The Zacks Consensus Estimate for 2019 has moved up 7.3% while the same for 2020 increased nearly 4.2% 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.
Argo Group International Holdings, Ltd. ARGO underwrites specialty insurance and reinsurance products in the property and casualty markets. The company delivered average positive surprise of 225.05% in the last four quarters. The Zacks Consensus Estimate for 2019 has moved up 0.5% while the same for 2020 increased 4.2% in the past 30 days. The stock carries a Zacks Rank #2 (Buy).
National General Holdings Corp. NGHC, a specialty personal lines insurance holding company, provides various insurance products and services in the United States. The company delivered average positive surprise of 21.57% in the last four quarters. The Zacks Consensus Estimate for 2019 has moved up 2.6% while the same for 2020 increased 2.9% in the past 30 days. The stock carries Zacks Rank #2.
Arch Capital Group Ltd. ACGL provides property, casualty, and mortgage insurance and reinsurance products worldwide. The company delivered average positive surprise of 14.72% in the last four quarters. The Zacks Consensus Estimate for 2019 has moved up 3.4% while the same for 2020 increased 5.2% in the past 30 days. The stock carries Zacks Rank #2.
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