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Insurance Industry Stock Outlook - May 2013 - Zacks Analyst Interviews
5/21/2013 4:42:00 AM
The year 2013 started off much better than expected for the U.S.
insurance industry, with most of the primary insurers beating first
quarter earnings estimates and reporting relatively low combined
ratios. Moreover, the sector continued to witness rising premium
rates which started a year back after a long period of softness.
Though insurers are preparing themselves better to withstand
significant losses, an increasing probability of natural
catastrophes due to growing global warming will continue to raise
concerns. This is without mentioning the tornado devastation in
Moore, Oklahoma this week, which, although nowhere near as
concentrated as the East Coast, will nonetheless result in further
losses for insurers.
However, the rating agency expects statutory capital growth to be moderate in 2013 given subdued earnings growth due to the low interest rate environment. Also, the agency does not expect a significant improvement in portfolio credit quality due to the expected weakness in investment income.
Currently, the life insurers with favorable Zacks Ranks worth considering include Protective Life Corporation ( PL ) and StanCorp Financial Group Inc. ( SFG ) with a Zacks Rank #1 (Strong Buy), and China Life Insurance Co. Ltd. ( LFC ) with a Zacks Rank #2 (Buy).
As U.S. health insurers are preparing themselves to comply with the mandates of the health care reform, their financials are expected to remain strong. Broad-based moderation in utilization has been primarily boosting the bottom line of health insurers. Also, increased access to capital and better retention opportunities are helping them grow consistently despite tardy economic growth.
Moreover, the carriers have been witnessing better credit quality in the recent quarters, reflecting a moderate industry risk.
In 2010, the historic health care reform legislation - The Patient Protection and Affordable Care Act (PPACA) - was passed by the Congress with the intension of making health care facilities more affordable, preventing private health insurers from continuing with the pre-existing condition clause and at the same time reducing the number of uninsured by bringing in 32 million more people under coverage by 2019.
The legislation had many detractors who contested several of its stated benefits and considered it another entitlement program that the country can ill afford. Finally, in Jun 2012, the U.S. Supreme Court ruled in favor of the reform, rejuvenating the industry by removing major uncertainties. Further, Obama's re-election in Nov 2012 essentially ensured a future to the law.
While the legislative overhaul brings more regulatory scrutiny for private insurers such as WellPoint Inc. ( WLP ) and UnitedHealth Group, Inc. ( UNH ), the net negative effect is expected to be far softer than was initially feared.
Although the full implementation of PPACA will be in 2014, the industry is expected to see gradual changes through the reminder of 2013. While bringing more people under coverage will add prospects for growth, the requirement to reduce health care costs will lead to margin compression.
Also, while the reform will provide more cross-selling opportunities for health insurers, their overall profitability will be limited over the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of bringing more people under the umbrella.
Consequently, substantial growth in industry revenue is not expected until 2015 as insurers will be forced to adjust the benefits to comply with the health care legislation. Among others, providing coverage to everyone regardless of an expensive pre-existing condition would put their top lines at stake.
(Want to know more about the future prospects of health insurers? Read our Health Insurance Stock Outlook )
Property & Casualty Insurers
Market hardening has been the key to improvement for property-casualty insurers in the recent quarters. After struggling with falling prices for years, insurers seem to finally reach a period of better premium rates. However, property-casualty insurers are still feeling the pressure on their investment portfolios due to the prevailing low interest rate environment. This has been continuously reducing the capital adequacy of most carriers.
Along with continually improving pricing power, better 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. And with credit markets remaining weak plus bond prices hovering at low levels due to persisting concerns over defaults, insurers may incur significant realized and unrealized capital losses on their portfolios in the upcoming quarters. Moreover, catastrophe losses continue to keep the balance sheets of a number of carriers under pressure.
However, the ongoing recovery in the credit and equity markets is leading to a reduction in unrealized investment losses. Also, once the economic recovery gains momentum, insurance volume will grow rapidly. With growing 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 increasingly witnessing a rebound in claims-paying capacity (as measured by policyholders' surpluses), which reflects the industry's resilience over the prior years. Conservative investment strategies and capital restructuring efforts will continue to help property-casualty insurers improve their financial footing in the upcoming quarters.
Currently, ProAssurance Corporation ( PRA ), XL Group plc ( XL ), Hilltop Holdings Inc. ( HTH ) and AXIS Capital Holdings Limited ( AXS ) with a Zacks Rank #1 are worth a look in the property-casualty industry.
The industry has been undertaking several structural changes that will make underwriting and pricing schemes even more attractive to consumers. Also, improving financial fundamentals on the back of favorable macroeconomic trends make the stocks of a number of industry participants appear attractive.
We remain positive on Alleghany Corporation ( Y ), American Safety Insurance Holdings Ltd. ( ASI ), White Mountains Insurance Group, Ltd. ( WTM ), Assured Guaranty Ltd. ( AGO ) and Eastern Insurance Holdings, Inc. ( EIHI ) with a Zacks Rank #1.
Other insurers that we like with a Zacks Rank #2 (Buy) include The Chubb Corporation ( CB ), Cincinnati Financial Corp. ( CINF ), Everest Re Group Ltd. ( RE ), PartnerRe Ltd. ( PRE ), American International Group, Inc. ( AIG ), Cigna Corp. ( CI ), The Hartford Financial Services Group, Inc. ( HIG ), MetLife, Inc. ( MET ), Prudential Financial, Inc. ( PRU ) and Amerisafe, Inc. ( AMSF ).
We expect continued pressure on investment yield and lower income from the variable annuity business to restrict the earnings growth rate of life insurers. Also, reduced financial flexibility and weak underwriting will hurt the earnings of many property-casualty insurers. Moreover, the overall industry is vulnerable to the ever-increasing threat of natural disasters.
Among the Zacks covered U.S. insurers, we prefer to stay away from the Zacks Rank #4 (Sell) stocks: ING Groep NV ( ING ), AFLAC Inc. ( AFL ), Loews Corporation ( L ), Meadowbrook Insurance Group Inc. ( MIG ) and Stewart Information Services Corporation ( STC ). Currently, there are no stocks with a Zacks Rank #5 (Strong Sell).
AFLAC INC (AFL): Free Stock Analysis Report
ASSURED GUARNTY (AGO): Free Stock Analysis Report
AMER INTL GRP (AIG): Free Stock Analysis Report
AMERISAFE INC (AMSF): Free Stock Analysis Report
AMER SAFETY INS (ASI): Free Stock Analysis Report
AXIS CAP HLDGS (AXS): Free Stock Analysis Report
CHUBB CORP (CB): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
EASTERN INSURNC (EIHI): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis Report
HILLTOP HLDGS (HTH): Free Stock Analysis Report
ING GROEP-ADR (ING): Free Stock Analysis Report
LOEWS CORP (L): Free Stock Analysis Report
CHINA LIFE INS (LFC): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
MEADOWBROOK INS (MIG): Free Stock Analysis Report
PROTECTIVE LIFE (PL): Free Stock Analysis Report
PROASSURANCE CP (PRA): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
EVEREST RE LTD (RE): Free Stock Analysis Report
STANCORP FNL CP (SFG): Free Stock Analysis Report
STEWART INFO SV (STC): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
WHITE MTN INS (WTM): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
ALLEGHANY CORP (Y): Free Stock Analysis Report
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