The insurance industry has been struggling to cope up with massive catastrophic losses, significant regulatory reforms as well as major upheavals in the financial markets of late. Given this bleak scenario, picking the prospective winning stocks and making a prudent investment decision for the best returns may seem an uphill task.
Catastrophe Looming Large
With the recent occurrences of Hurricanes Harvey, Irma and Maria, the insurance industry is anticipating an apparent dent in the underwriting results, thereby affecting overall performance.
Per the catastrophe modeler AIR Worldwide, the estimate for insured losses from Irma could range between $25 billion and $35 billion. Also, per AIR Worldwide, the projected insured losses for Maria will vary between $40 billion and $85 billion.
Further, AIR Worldwide has provided an insurance industry loss estimate following the huge impact of the 8.1 magnitude earthquake that hit Mexico in early September. The figure enormously ranges between $0.8 billion and $1.1 billion. Per the same global catastrophe risk modeler, the industry loss estimate is expected up to $2.1 billion, following another tremor that rocked Mexico on Sep 19, 2017.
However, the insurance industry can still find some hope and fall back on such disasters to induce substantial price rise that has been flat owing to a not-so-active catastrophe environment.
Despite the mounting losses, which are sure to have a negative impact on the insurers’ overall results, such tropical storms can be touted as a blessing in disguise as in catastrophic events are a necessary evil to the insurance industry for improving their pricing to eventually minimize competition.
We wait and see if such catastrophe losses and weather-oriented events have the capacity to reduce the already large capital reserve and bring a change to the insurance pricing cycle in the near term.
Interest Rate Environment — Impact on the Insurance Industry
It did not come as a surprise when the Federal Reserve kept the interest rates unchanged, ranging between 1% and 1.25% at its meeting on Sep 20, 2017. However, investors are still looking forward to another interest rate hike this year, as indicated by the policymakers at the meeting. Interestingly, the Fed committee also expects to raise interest rates three times in 2018. Hence, the market is pinning hopes on the next rate hike, which is likely boost the insurance industry’s prospects and help insurers strengthen their market position.
A progressing rate environment will lessen the pressure on the insurers’ investment income, thus boosting their earnings. This in turn will accelerate the insurance companies’ overall growth in the future.
Certain Other Factors Influencing the Insurance Industry
Apart from colossal catastrophe losses, there are factors to impact the industry performance in the near term as well.
Low inflation, for which the Federal Reserve could not deliver any proper explanation, is expected to remain at 1.6% — falling shy of the 2% target that is considered good for the economy.
Hence, low inflation, rapidly changing climatic conditions and the short-term push to the gasoline prices, render uncertainty to the Federal Reserve’s decision as when to increase interest rates in the immediate term.
On the brighter side, a reviving housing market is anticipated to enhance insurable exposures and premiums written. But we wait and see if this momentum continues in the short term as well. Additionally, an improving employment scenario and a positive consumer sentiment buoy optimism.
Outperformers in September
Despite widespread catastrophic losses and challenging market conditions, improved interest rates and an improving economy have lent a silver lining to the cloud of calamities for insurers. These are capable of reaping profits through underlying strength and business modification.
We zeroed in on five insurers that have outperformed in September despite all odds based on price performance and a favorable Zacks Rank backed by positive estimate revisions.
Stamford, CT-based The Navigators Group, Inc. NAVG underwrites ocean marine, property and casualty, professional liability plus specialty insurance products and services in the United States as well as internationally. The Zacks Consensus Estimate for earnings per share moved up 2.4% to $2.54 for 2017 and 2.9% to $2.41 for 2018 over the last 60 days.
This is reflected through the company’s Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Notably, expected earnings growth for the current financial year is 7.2%.
Shares of Navigators Group have gained 4.6% compared with the industry’s increase of 1.4% and the S&P 500 index’s gain of 1.7%.
Carmel, IN-based CNO Financial Group, Inc. CNO develops, markets and administers health insurance, annuity, individual life insurance and other insurance products for senior and middle-income markets in the United States. The Zacks Consensus Estimate for earnings per share moved up 1.9% to $1.62 for 2017 and 0.6% to $1.69 for 2018 over the last 60 days. This is represented by the company’s Zacks Rank #2. Expected earnings growth for the current financial year is 10.2%.
Shares of CNO Financial have gained 3.1% compared with the industry’s growth of 3.0% and the broader market’s gain of 1.7%.
West Des Moines, IA-based FBL Financial Group, Inc. FFG sells individual life insurance and annuity products. The Zacks Consensus Estimate for earnings per share scaled up 4.7% to $4.45 for 2017 and 1.2% to $4.35 for 2018 over the last 60 days. This is again reflected through the Zacks #2 Ranked company. Expected earnings growth for the current financial year is 4.7%.
Shares of FBL Financial have gained 8.2% compared with the industry’s increase of 3.0% and the S&P 500 index’s gain of 1.7%.
Chesterfield, MO-based Reinsurance Group of America, Incorporated RGA provides individual and group life plus health insurance products besides asset-intensive and financial reinsurance products. The Zacks Consensus Estimate for earnings per share inched up 0.2% to $10.18 for 2017 and 0.5% to $10.74 for 2018 over the last 60 days. This is clearly evident through the company’s bullish Zacks Rank #2. Notably, expected earnings growth for the current financial year is 4.7%.
Shares of Reinsurance Group have increased 3.6% against the industry’s loss of 1.2% and substantially outperforming the S&P 500 index’s gain of 1.7%.
Radnor, PA-based Lincoln National Corporation LNC engages in multiple insurance and retirement businesses in the United States. The Zacks Consensus Estimate for earnings per share nudged up 0.3% to $7.45 for 2017 and 0.1% to $7.66 for 2018 over the last 60 days. This is clearly understood by the company’s Zacks Rank of 2. Expected earnings growth for the current financial year is 14.6%.
Shares of Lincoln National have increased 6.6% against the industry’s loss of 1.2% and the figure is significantly ahead of the broader market’s gain of 1.7%.
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Lincoln National Corporation (LNC) : Free Stock Analysis Report
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