With a slew of events and weather-related occurrences making waves in the insurance industry, it will be interesting to see how the industry will fare in the fourth and final quarter of 2017. Starting from massive catastrophe loss to a gradual rise in interest rates along with an improving employment scenario and other economic conditions, the insurance industry has seen it all. Amid such changing conditions, the industry still managed to hold its own and we expect it to do the same in the soon-to-be-reported quarter.
Below we will discuss the various scenarios that have influenced the Property and Casualty Insurance industry in particular to a great extent.
Facing the Storm: Catastrophe Losses
The property and casualty insurers faced the biggest brunt of a massive catastrophe loss, having largely impacted the industry and qualifying the year as the costliest in terms of incurring weather-related loss. Notably, per Swiss Re, the total economic losses from natural and man-made disasters in 2017 are projected to be $306 billion.
Further adding to the woes without respite, the fourth quarter also witnessed the Northern California wildfires resulting in catastrophe losses, posing a threat to dent the P&C insurers’ underwriting profitability. Chubb Limited CB estimated preliminary loss for the fourth quarter attributable to natural calamities of about $249 million after tax largely stemming from the Californian wildfires.
In view of such losses, the insurers will experience weak underwriting results, disrupting the overall performance. But there is a silver lining in this catastrophe cloud, as the insurers braved price hikes, which remained flat in the past several quarters due to a not so active catastrophe environment. Nevertheless, there are a few insurers with an encouraging track record of weathering such setbacks and emerging winners on the back of their core fundamental strengths.
Gradual Improvement in the Interest Rates
The steady increase in interest rates has benefited the insurance industry. The Federal Reserve delivered in its promise to raise the rates thrice in 2017 by announcing the third and the final interest rate hike at its last FOMC meeting held on Dec 13. The interest rate now ranges between 1.25% and 1.50%.
A progressing rate environment has lessened the pressure on the insurers’ investment income, boosting their earnings in process. Moreover, a higher rate environment would make the pricing environment more competitive, further supporting carriers to grow. It is important to note here that investment income constitutes a major component of insurer’s top line.
Other Factors Influencing the Industry
With cyber attacks on the rise, the P&C insurance industry has seen improvement in cyber security insurance, which has led to noticeable premium growth. This apart, advancement in technology has enabled insurers to enhance operational efficiency, starting from underwriting and policy administration to claims and risk management.
Additionally, there are a few other factors impacting the industry performance during this time period. To that end, low inflation has remained at 1.7%, falling shy of the 2% target, which is considered good for the economy. Moreover, a reviving housing market is anticipated to enhance insurable exposures and premiums written. Plus, an improving employment scenario and a positive consumer sentiment buoy optimism.
Price Performance
Despite all odds, the industry has scored better than the S&P 500 index in the fourth quarter, riding on core strength. While the industry has gained 6.7%, the elite index has risen 6.4%.
Industry Rank
The P&C Insurance industry is currently ranked at #92, falling within the top half (industries with the best average Zacks Rank) of the Zacks Industry Rank.
Outperformers of Q4
Despite adversities spurting concerns for insurers this year, positives like a rising interest rate environment and an improving economy have helped the following stocks perform well in the fourth quarter and yield profits through core strength and business modification.
Here is a list of four top-ranked insurers that outperformed the industry in the last quarter. These stocks hold promise to deliver favorable results, banking on operational strength. Also, an impressive Value Score of A or B combined with Zacks Rank #2 (Buy) makes these stocks worth investment bets. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Northbrook, IL-based The Allstate Corporation ALL deals in property-liability insurance and life insurance business in the United States and Canada. Shares of Allstate Corporation have rallied 13.9% in the fourth quarter, outperforming the industry’s increase of 6.7%. The company has a Value Score of A.
Shares of Santa Ana, CA-based financial service provider First American Financial Corp. FAF, have gained 12.2% in the fourth quarter, outpacing the industry’s rise. The company has a Value Score of A.
Mayfiled Village, OH-based The Progressive Corp. PGR provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Shares of Progressive have climbed 16.3% in the fourth quarter, ahead of the industry’s increase. The company has a Value Score of B.
Greenwich, CT-based W.R. Berkley Corp. WRB operates as commercial lines writer in the United States and internationally. Shares of W.R. Berkley have grown 7.4% in the fourth quarter, higher than the industry’s gain. The company has a Value Score of B.
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