The U.S. insurance industry continues to gain traction on
earnings growth and risk management across the board, thanks to
better premium rates after prolonged softness since the height of
the financial crisis. Further, favorable reserve development and
modest catastrophe losses helped insurers show potency in 2013.
The sector is set to reach a favorable pricing cycle with assured
improvement in pricing power as demand from economically
recuperating American households rise. But a dearth of positive
catalysts is holding back growth. Among the fundamental challenges,
weak underwriting gains and low investment yields stand out.
Though modest catastrophe losses helped the industry to witness
significant recovery in underwriting and lower combined ratio in
2013, underwriting performance is expected to remain subdued in
2014. This, along with heightened market competition, will drag
Insurers continue to prepare themselves better to buttress drastic
losses from catastrophes, but increasing probability of such
incidents continues to raise concerns. Some analysts expect
catastrophic losses to double every 10 years and the pace of
capacity buildup by the insurers to be insufficient to withstand
the resulting insured losses.
However, the overall health of the industry improved to a great
extent in the recent past riding on improved macroeconomic trends,
after enduring pricing pressures and reduced insured exposure since
the latest recession. Moreover, learning from past experiences,
insurers are now resorting to expense saving measures for
Rising premium rates should ultimately translate into margin
expansion and mitigate the negative impact of the still low
interest rate environment on insurers' investment income. Also,
insurers now have ample capital to take on new challenges. Further,
increasing awareness on the risk of catastrophe, favorable reserve
development and efforts to strengthen underwriting discipline
should support the industry.
That said, though the market condition isn't soft anymore,
reasonable hardening is not expected at least in the near term.
Moreover, stress on balance sheet, lack of real employment growth
and legislative challenges are threatening insurers' ability to
rebound to the historical growth rate.
Also, limited organic growth opportunities and more capital for
regulatory requirement will push the industry toward consolidation.
Insurers are seeking structural economies of scale through mergers
and acquisitions to enhance market share. While this will help
insurers stay afloat, inter-segment competition will alleviate. So
increasing profitability after complying with regulatory
requirements would be quite a tall order.
Zacks Industry Rank
Within the Zacks Industry classification, insurers are broadly
grouped in the Finance sector (one of 16 Zacks sectors) and are
further sub-divided into five industries at the expanded level:
Insurance - Property & Casualty, Insurance - Multiline,
Insurance - Accident & Health, Insurance - Life and Insurance -
Brokers. The level of sensitivity and exposure to different stages
of the economic cycle vary for each industry.
We rank all the 260-plus industries in the 16 Zacks sectors based
on the earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
As a guideline, the outlook for industries with Zacks Industry Rank
#88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and
#177 and higher is 'Negative.'
The Zacks Industry Rank for Insurance - Property & Casualty is
#29, Insurance - Multiline is #35, Insurance - Accident &
Health is #114, Insurance - Life is #164 and Insurance - Brokers is
#171. Looking at the Zacks Industry Rank of the five insurance
industries, it can be safely said that the near-term outlook for
the group is 'Neutral.'
Earnings Trend of the Sector
The broader Finance sector, of which the insurance industry is
part, is about to report fourth-quarter results. The consensus
earnings expectations for the quarter show an improvement.
Earnings growth for the quarter is expected to increase to 20.3%
from 10.5% in the third quarter. Overall, the sector is expected to
register full-year earnings growth of 10.6%.
However, revenues are expected to decline 5.1% in the fourth
quarter compared to a fall of 15.7% in the third quarter. While
both earnings and revenues indicate improvement, margin is expected
to deteriorate to 3.26% from 4.14% in the third quarter.
For a detailed look at the earnings outlook for this sector and
others, please read our latest Earnings Trends report.
Life Insurers Should See Modest Growth
Reduction in underwriting expenses and a modest increase in
premiums have been helping life insurers increase net income in the
last few quarters. But downward pressure on investment yields due
to higher hedging costs, lower income from the variable annuity
business and more burdensome capital requirements will continue to
Moreover, life insurers have struggled with low interest rates for
years now as they primarily invest in long-term interest earnings
assets which were not able to generate sufficient returns to match
up their future commitments related to the policies sold to various
Until the interest rate environment shows improvement, life
insurers will have to continue to seek alternative asset classes to
optimize return from investments. The addition of any risky asset
class in their investment portfolios with hopes of better yield may
result in further losses.
However, the rise in the U.S. Treasury yields since the middle of
2013 is expected to change the fate of life insurers. As the
long-term bond yields have finally started rising, cash flows of
life insurers will be invested at higher yields, leading to higher
returns and increased profit margins.
The industry's statutory capital level improved significantly in
2013, with the help of steady retained earnings and effective
capital management. A beefed up capital market should keep the
industry's liquidity profile strong in the upcoming quarters and
help industry participants confront challenges.
Balance sheet fundamentals are expected to improve to some extent
on better operating performance in recovered financial markets.
However, the overall growth of the industry will heavily depend on
the interest rate scenario.
The underlying trends in a recovering economy indicate modest
improvement in the sector over the medium term with respect to
credit profile and financial prospects. However,
higher-than-average asset losses, primarily resulting from real
estate exposure, will be a major concern.
On the other hand, Americans, primarily the young, have
significantly reduced expenditures on life insurance products, and
are instead choosing alternative investments that promise better
returns. But continued economic recovery and higher disposable
income will help life insurers broaden their customer base. Also,
the carriers are transforming their products and businesses to make
them attractive and profitable for customers.
Currently, the life insurers with favorable Zacks Ranks worth
Lincoln National Corporation
Protective Life Corporation
Reinsurance Group of America Inc.
) with a Zacks Rank #2 (Buy).
P&C Insurers on Growth Trajectory
Market hardening has been the key to improvement for
property-casualty insurers in the recent quarters. After struggling
with falling prices for years, the industry seems to have finally
reached better premium rates.
However, the carriers are still feeling the pressure on their
investment portfolios due to the overall interest rate environment
which is still low. Concerns related to weak capital levels are now
things of the past though, as the industry's capital position has
been building up on the back of improved earnings.
Along with continually improving pricing power, stronger
preparation to withstand catastrophe-related losses should help
insurers perform better in the upcoming quarters despite the
pressure on investment income.
As property-casualty insurers hold about two-thirds of the invested
assets in the form of bonds, their capacity is highly sensitive to
changes in credit market conditions. With credit and equity markets
turning around and long-term bond yields on the rise, insurers are
likely to incur lesser realized and unrealized capital losses on
their portfolio in the quarters ahead.
Moreover, insurance volume is expected to expand going forward on
speedier economic recovery. With improved employment in the private
sector and recovery in the housing markets, a number of carriers
have already started seeing growth in insurance sales.
The recent quarters have been witnessing a rebound in claims-paying
capacity (as measured by policyholders' surpluses), which reflects
the industry's resilience. Conservative investment strategies and
capital restructuring efforts will continue to help
property-casualty insurers improve their financial footing in the
The overall industry should be able to perform better over 2014
with increased support from both external and fundamental factors.
Proactive steps on transformational measures, including adoption of
technology solutions, will give a competitive advantage. Also, in
order to meet evolving consumer demands, insurers must innovate.
llied World Assurance Company Holdings
Hilltop Holdings Inc.
) -- all with a Zacks Rank #1 (Strong Buy) -- are worth a look in
the property-casualty space.
The industry has been undertaking several structural changes that
will make underwriting and pricing schemes even more attractive to
consumers. Also, improving fundamentals on the back of favorable
macroeconomic trends make the stocks of a number of industry
participants appear attractive.
We remain positive on
Greenlight Capital Re, Ltd.
Aspen Insurance Holdings Ltd.
Maiden Holdings, Ltd.
CNO Financial Group, Inc.
) with a Zacks Rank #1.
Other insurers that we like with a Zacks Rank #2 include
The Chubb Corporation
American International Group, Inc.
Prudential Financial, Inc.
Reinsurance Group of America Inc.
We expect continued pressure on investment yield and lower income
from the variable annuity business to restrict the earnings growth
rate of life insurers at least in the near term. Also, pressure
underwriting will hurt the earnings of many property-casualty
insurers. Moreover, the overall industry is vulnerable to the
ever-increasing threat of natural disasters.
We would suggest staying away from the Zacks Rank #5 (Strong Sell)
stocks such as
Catlin Group Ltd.
Tower Group International, Ltd.
Fortegra Financial Corporation
AGEAS-ADR (AGESY): Get Free Report
ASPEN INS HLDGS (AHL): Free Stock Analysis
AMER INTL GRP (AIG): Free Stock Analysis Report
AMERISAFE INC (AMSF): Free Stock Analysis
ALLIED WORLD AS (AWH): Free Stock Analysis
CHUBB CORP (CB): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
CATLIN GROUP LT (CLNGF): Get Free Report
CNO FINL GRP (CNO): Free Stock Analysis Report
FORTEGA FIN CP (FRF): Free Stock Analysis
GREENLIGHT CAP (GLRE): Free Stock Analysis
HILLTOP HLDGS (HTH): Free Stock Analysis Report
LINCOLN NATL-IN (LNC): Free Stock Analysis
MAIDEN HOLDINGS (MHLD): Free Stock Analysis
PROTECTIVE LIFE (PL): Free Stock Analysis
PROASSURANCE CP (PRA): Free Stock Analysis
PARTNERRE LTD (PRE): Free Stock Analysis Report
PRUDENTIAL PLC (PUK): Free Stock Analysis
REINSURANCE GRP (RGA): Free Stock Analysis
RLI CORP (RLI): Free Stock Analysis Report
TOWER GRP INTL (TWGP): Free Stock Analysis
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