It’s the tail end of 2017 and we are just a few days away from ringing in the New Year. This year has been a mixed bag of sorts for the insurance industry. While economic improvement and consecutive rate hikes triggered some good news, a number of catastrophe events jeopardized the underwriting profitability for insurers.
Pinning hopes that the catastrophe environment will remain benign next year, the insurance industry will stand to benefit from the favorable macro backdrop leveraging its core strengths. Also, strategic initiatives to have a diversified portfolio, to expand globally and add capabilities plus mergers and consolidation to accelerate growth position insurers well for a healthy performance.
Silver Lining in the Cloud
A slew of natural calamities inducing cat loss dented the underwriting profitability of insurers this year. Per the data released by Munich Reinsurance company, catastrophe loss in the first half amounted to $41 billion while Swiss Re estimated a catastrophe loss of $95 million in the third quarter. The fourth quarter is likely to suffer, partly due to the California wildfires. Per Swiss Re, the total economic loss from natural and man-made disasters in 2017, are projected at $306 billion.
However, due to such a massive loss, insures have braved the price hike that remained flat due to a not-so-active catastrophe environment. In order to retain business and survive competition, insurers were earlier jittery about the price rise. But now with higher prices, not only insurers might enjoy higher premiums going forward but be also well-equipped to settle claims with less adverse impact on profitability.
Improving Rate Environment
After remaining at a near-zero level for about eight years, the Federal Reserve started to gradually raise the interest rate, reflecting the economic strength to gain traction and the US President Donald Trump’s bias for rate hikes.
The Fed has kept its promise of three rate hikes in 2017 and the interest rate now stands at 1.25-1.50%. Retaining this optimism, the outgoing Fed chairperson Janet Yellen reiterated expectations for three rate increases in 2018.
Insurers are major beneficiaries of an improving rate environment. With the progressing rate environment, investment income is also set to grow. Investment income is an important component of insurers’ top line. Life insurers having suffered spread compression on products like fixed annuities and universal life due to persistently low rates will also benefit from higher rates.
Economic Data Instills Hope
An improving employment situation, inflation approaching 2%, easing of the U.S. dollar and a momentum in oil prices are parameters highlighting a better economic scenario. All these together fuel the approval for rate hikes.
The economic scenario remains encouraging. While the Fed officials expect unemployment to decline to 3.9% in 2018, the GDP is predicted to grow at 2.5%, reflecting an increase from 2.1%, projected earlier. Inflation rate is estimated at 1.9% in 2018.
A reviving housing market is anticipated to enhance insurable exposures and premiums written. Stronger corporate bonds and an improving real estate market might help curtail the credit-related investment losses.
Also, Trump’s tax reform policy, an overhaul to tax code after 31 years, lowers the corporate tax burden. The corporate tax rate lowered to 20% from 35% will likely act as an impetus.
Price Performance
Despite all odds, the insurance industry has scored better than the S&P 500 index so far this year, riding on core strength. While the industry has gained 17.1%, the elite index has risen 16.9%.
Industry Rank
The Insurance industry is further divided into five components and four of them fall within the top half (industries with the best average Zacks Rank) of the Zacks Industry Rank.
Accident & Health at #5, Brokerage at #76, Property and Casualty at #101 and Life at #105 fall in the top slot. Only Multiline is ranked at #172.
Top Picks
As the New Year unfolds, investment decisions should also be reviewed to make the investors’ portfolio a compelling one to maximize returns.
With the help of our Zacks Stock Screener, we shortlist five solid stocks that an investor can safely add in the portfolio for better yields.
While we stick to only top-ranked stocks with a market capitalization of at least $3 billion, we further streamlined our search with the Value Scores of A or B as back-tested results have shown that stocks with the Value Scores of A or B combined with a bullish Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
Notably, these stocks have rallied more than 15% so far this year, have long-term earnings growth of more than 7% and have witnessed 2018 estimates being moved north in the last four weeks.
Bloomfield, CT-based Cigna Corp. CI through its subsidiaries is a major provider of health care and related benefits, mostly offered through workplace.
Market Cap: Nearly $50 billion
Zacks Rank #2
Value Score of B.
LTG: 12.6%.
The Zacks Consensus Estimate for 2018 has moved up 0.2%
YTD Price Gain: 51.97%
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Headquartered in Branchville, NJ, Selective Insurance Group, Inc. SIGI provides insurance products and services in the United States.
Market Cap: Nearly $3.4 billion
Zacks Rank of 1
Value Score of B
LTG: 12.2%
The Zacks Consensus Estimate for 2018 has been raised 7.7%
YTD Price Gain: 34.96%
Headquartered in Mayfield Village, OH, The Progressive Corporation PGR via its subsidiaries, provides personal and commercial property-casualty insurance and other specialty property-casualty insurance and related services primarily in the United States.
Market Cap: Nearly $32.8 billion
Zacks Rank of 2
Value Score of B
LTG: 7.3%
The Zacks Consensus Estimate for 2018 has been inched up 0.8%
YTD Price Gain – 58.76%
Headquartered in Milwaukee, WI, MGIC Investment Corporation MTG, through its subsidiaries, provides private mortgage insurance and ancillary services to lenders and government sponsored entities in the United States.
Market Cap: Nearly $5.3 billion
A Zacks #2 Ranked player
Value Score of B
LTG: 8.5%
The Zacks Consensus Estimate for 2018 has been increased 1.4%
YTD Price Gain: 41.12%
Headquartered in Radnor, PA, Lincoln National Corporation LNC engages in the multiple insurance and retirement businesses in the United States via its subsidiaries.
Market Cap: Nearly $16.9 billion
A #2 Ranked player
Value Score of A
LTG: 8.7%
The Zacks Consensus Estimate for 2018 has been revised 0.6% upward
YTD Price Gain: 16.49%
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