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6 Top-Ranked Insurance Stocks to Enrich Your Portfolio in 2H

Tanuka De

A favorable operating environment helped the insurance industry perform well through the first half of 2019 and set the stage for the second half. Though macro factors like no interest rate hike, trade tariffs and inflation rate are expected to result in volatility, the insurance industry is expected to push the boundaries.

Factors Likely to Impact Second Half Performance

Cat Environment

The second half of the year is marred by the hurricane season that weighs on the profits of insurers. Hurricanes Lane, Florence and Michael, and other catastrophes like Typhoon Jebi and California wildfires took a toll on insurers’ results last year. Per Munich RE, catastrophe losses in 2018 amounted to $160 billion, of which half was insured.

Colorado State University estimates ‘near average Atlantic hurricane season in 2019’. Per a report on Jun 2, 2019, it predicted 14 named storms this hurricane season that runs from Jun 1 to Nov 30, including six hurricanes, of which two could be major hurricanes (Saffir/Simpson).   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) increased to 9.4% in the first quarter of 2019. Industry surplus moved up to $779.5 billion as of Mar 31, 2019 from $742.2 billion as of Dec 31, 2018, a record $37.4 billion increase according to the report.  Net underwriting gains increased 29.3% to $5.3 billion in first-quarter 2019, though combined ratio deteriorated 100 basis points to 95.6% on a year-over-year basis per the report.

Pricing Firming Up

Catastrophic occurrences weigh on insurers’ underwriting profitability. Nonetheless, price hikes by industry players following a series of cat events should help them stay afloat.  In the first quarter of 2019, in personal lines insurance, homeowners, automobile and personal articles saw rate increase of 2%, 2.5% and 1%, respectively. In Commercial, most of the lines saw premium rate increase of 2% while Commercial Auto saw a 7% rate increase. Per Willis Towers Watson plc’s Commercial Lines Insurance Pricing Survey, in the rest of 2019, most of the commercial insurance lines should witness rate increase. Further, portfolio repositioning and reinsurance covers should help insurers withstand the deficits.

Interest Rate

Following four rate hikes in 2018, the Federal Reserve decided to keep interest rate unchanged within its target range of 2.25% to 2.5%. In fact, new projections indicate that the Fed might lower rates in 2020. Per reports, at least eight Fed members expect a rate cut by 2019. Fed chair Jerome Powell stated that dissatisfying trade negotiations and data pointing to a softening economy could lead to a rate cut. Fed officials expect 2019 interest rate at 2.4%.

Insurers, who are major beneficiaries of a rising rate environment because of their sensitivity to interest rates, are well poised amid uncertainties, given their strong fundamentals.

Other Factors

A strong labor market as evident from a lower unemployment rate and rising wages is expected to boost policy sales even at higher premiums. Fed officials expect unemployment rate to be 3.5% and GDP to be 2.1% in 2019. Also, growth in aging population is likely to drive demand for retirement benefit products.

Also, adoption of technologies like artificial intelligence (AI), robotic process automation (RPA), cognitive intelligence (CI) or blockchain should help life insurers curb operational costs.

Price Performance

Year to date, the insurance industry has rallied 11.1% compared with the S&P 500 Index’s rise of 10.7%.


Stocks Trading Cheap

In view of the favorable operating backdrop and solid fundamentals, it seems to be an appropriate time to buy insurance stocks. Also, their valuation looks cheap now. Price-to-book ratio (P/BV), the most appropriate multiple for valuing insurers because of large variations in earnings from one quarter to the next, is 2.535, lower than the S&P 500 Index’ 4.05 and the Finance sector’s reading of 2.72.

Stocks to Add to Your Portfolio

With the help of the Zacks Stock Screener, we have shortlisted six 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.

Pembroke, Bermuda, Arch Capital Group Ltd. ACGL provides property, casualty, and mortgage insurance and reinsurance products worldwide.

Zacks Rank #2 (Buy)
The Zacks Consensus Estimate for 2019 bottom line has risen 1.5%.
Value Score of B
The consensus estimate for current-year earnings indicates a 21.4% year-over-year increase on 7.8% higher revenues.

Santa Ana, CA-based First American Financial Corporation FAF provides financial services.

Zacks Rank #2
The Zacks Consensus Estimate for 2019 bottom line has increased 0.8%.
Value Score of B
The consensus estimate for current-year earnings implies a 13.1% year-over-year increase on 1.4% higher revenues.

Pembroke, Bermuda based James River Group Holdings, Ltd. JRVR provides specialty insurance and reinsurance services in the United States.

Zacks Rank #2
The Zacks Consensus Estimate for 2019 bottom line has increased 1%.
Value Score of B
The consensus estimate for current-year earnings suggests a 12.9% year-over-year increase.

Philadelphia, PA-based Radian Group Inc. RDN engages in the mortgage and real estate services business in the United States.

Zacks Rank #1
The Zacks Consensus Estimate for 2019 bottom line has risen 0.8%.
Value Score of A
The consensus estimate for current-year earnings indicates a 6.3% year-over-year increase.

Tampa, FL-based Health Insurance Innovations, Inc. HIIQ operates as a cloud-based technology platform and distributor of individual and family health insurance plans, and supplemental products in the United States.

Zacks Rank #1
The Zacks Consensus Estimate for 2019 bottom line has increased 11.5%.
Value Score of B
The consensus estimate for current-year earnings implies a 50.8% year-over-year surge on 31.1% higher revenues.

Reno, NV based Employers Holdings, Inc. EIG operates in the commercial property and casualty insurance industry primarily in the United States.
Zacks Rank #1
The Zacks Consensus Estimate for 2019 bottom line has increased 9.8%.
Value Score of B

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Radian Group Inc. (RDN) : Free Stock Analysis Report
Employers Holdings Inc (EIG) : Free Stock Analysis Report
Health Insurance Innovations, Inc. (HIIQ) : Free Stock Analysis Report
James River Group Holdings, Ltd. (JRVR) : Free Stock Analysis Report
Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report
First American Financial Corporation (FAF) : Free Stock Analysis Report
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