The U.S. insurance industry is running out of steam, with
companies that have reported Q1 earnings so far showing a
year-over-year slowdown. The insurers that are yet to report are
unlikely to change the picture as the industry apprehends an 11.8%
earnings decline. Moreover, the pace of premium rate increase,
though not dramatic, has stalled thanks to the continued low
interest rate environment.
Fundamental challenges such as weak underwriting gains and low
investment yields also stand out. While loss of earnings momentum
can be short lived, a respite from the underlying weakness is not
expected before long. Earnings growth would also be stalled by
heightened market competition.
The ongoing reserve development brings some relief. Also,
increasing demand from economically recuperating American
households should keep the endeavor to reach a favorable pricing
A lot depends on catastrophe losses too. The forecast of a
below-average 2014 Atlantic hurricane season is expected to keep
catastrophe losses modest similar to last year. This should lead to
further recovery in underwriting and a lower combined ratio this
Looking at broader trends, 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
If insurers manage to overcome the short-term resistance that may
be holding back premium rate increase, they should ultimately
witness margin expansion and mitigate the adversities of the still
low interest rate environment to their investment income. Also,
insurers now have ample capital to take on new challenges and
increasing awareness on the risk of catastrophe.
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 for a bigger share of the market. 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 (P&C), 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
#31, Insurance - Accident & Health and Insurance - Life is
#105, Insurance - Multiline is #150 and Insurance - Brokers is
#168. 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.'
So far 54.5% companies in the Insurance industry, which is the
medium level (or M-level) component of the broader Finance sector,
have reported Q1 results. The earnings beat ratio (percentage of
companies coming out with positive surprises) is 75.0%, while the
revenue beat ratio stands at 50.0%.
The broader Finance sector looks downbeat in terms of growth. So
far, 68.4% of the sector participants have reported Q1 results,
with decent beat ratios but disappointing earnings and revenue
While the earnings beat ratio came in at 66.7%, the sector is
expected to witness an earnings decline of 7.0% year over year
compared with growth of 18.4% in the prior quarter. However, the
sector is expected to register full-year earnings growth of 3.6%.
Revenues are also expected to decline 3.6% compared with a marginal
fall of 0.6% in the prior quarter. For a detailed look at the
earnings outlook for this sector and others, please read our latest
Earnings Trends report
Modest Growth Ahead for Life Insurers
Life insurers managed to increase net income in the last few
quarters by trimming underwriting expenses and with the help of a
modest increase in premiums. 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 mar profitability.
Moreover, life insurers have been struggling with low interest
rates for years, as these primarily invest in long-term interest
earnings assets which were not able to generate sufficient returns
to match their future commitments related to the policies sold to
Until the interest rate environment reverses, life insurers will
have to continue to seek alternative asset classes to optimize
return from investments. But the addition of any risky asset class
in their investment portfolios with hopes of better yield may
result in further losses.
However, continued tapering of fiscal stimulus raises the hope for
rate increase, which should significantly benefit life insurers. In
a higher rate environment, cash inflows of life insurers will lead
to higher returns and increased profit margins.
The industry's statutory capital level improved significantly in
the last few quarters, 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.
Moreover, 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.
Growth Momentum Continues for P&C Insurers
P&C Insurers have been witnessing improvement across most
segments in recent quarters. However, market hardening, which is
the key to improvement, appears to have slowed again. After
struggling with falling prices for years, the industry witnessed
better premium rates in 2013, but lack of improvement in the
interest rate environment is again restricting the improvement.
Moreover, the carriers are still feeling the pressure on their
investment portfolios due to the overall low interest rate
On the other hand, concerns related to weak capital levels are now
things of the past, as the industry's capital position has been
building up on the back of better-than-before earnings.
While a pause in improving pricing power and continued pressure on
investment income are concerns, capital strength and stronger
preparation to withstand catastrophe-related losses should prompt
decent results from P&C insurers in the upcoming quarters.
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
showing improvement, insurers are likely to incur lesser realized
and unrealized capital losses on their portfolios in the quarters
Moreover, insurance volume is expected to expand going forward on
speedier economic recovery. With improved employment in the private
sector and recovery, though uneven, in the housing markets, a
number of carriers have seen growth in insurance sales in the
Further, the recent quarters have seen 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
Most importantly, 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.
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
Allied World Assurance Co.
Aspen Insurance Holdings Ltd.
Atlas Financial Holdings, Inc.
W.R. Berkley Corporation
Horace Mann Educators Corp.
Symetra Financial Corporation
) with a Zacks Rank #1.
Other insurers that we like with a Zacks Rank #2 include
Everest Re Group Ltd.
RenaissanceRe Holdings Ltd.
Arthur J Gallagher & Co.
Marsh & McLennan Companies, Inc.
ING Groep N.V.
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 on
underwriting will hurt the earnings of many property-casualty
We would suggest staying away from the Zacks Rank #5 (Strong Sell)
stocks such as
Greenlight Capital Re, Ltd.
Hallmark Financial Services Inc.
Fortegra Financial Corporation
Willis Group Holdings
Health Insurance Innovations, Inc.
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