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A favorable operating environment has set the stage for insurers to perform well through the second half of 2018.
Though macro factors like interest rate hike, trade tariffs, rise in oil prices and inflation rate should continue to render volatility in markets and sectors, the insurance industry is expected to push limits, banking on inherent strength cushioned by a beneficial operating environment.
Strengthening of the U.S. economy has propelled the Federal Reserve raise rate from its near-zero level. In its June meeting, Federal funds rate was projected at 2.4% for 2018. Though insurers have lowered their exposure to rate sensitive instrument, yet given the accelerated pace of rate hikes, they stand to benefit.
Employment statistics instill optimism as a solid labor market reflecting lower unemployment level and higher wages increases the disposable income, thus widening scope for more policy writings. Fed officials anticipate a 3.8% unemployment rate while GDP is expected to grow 2.7% in 2018.
Also, increased frequency of catastrophe events has impelled an increase in coverage policies.
The tax rate overhaul, amounting to $1.5-trillion lower tax burden, slashed the rate to 21% from 35%. A lower tax incidence broadens chances of effective capital deployment as well as margin expansion. Insures have already started to see benefits of this lower tax incidence.
The first half of 2018 escaped the brutal blows of nature but given the unprecedented nature of catastrophes, none is sure what lies ahead. The second half of 2017 witnessed the merciless wrath of nature turning the year into the costliest phase in terms of catastrophe loss. While Hurricane Harvey wreaked havoc in August, Irma and Maria devastated parts of the United States in September. And further adding to the woes, were two consecutive earthquakes in Mexico in September. Also, there were California wildfires during October affecting many.
Catastrophic occurrences weigh on insurers' underwriting profitability. Nonetheless, price hikes by the industry players following a series of cat events, prudent underwriting practices, portfolio repositioning and taking reinsurance covers should help insurers withstand the deficits.
While greater demand for insurance (particularly with the emergence of new insurable risks including cyber threats) will keep the business of P&C insurers afloat, their willingness to negotiate on policy terms and ample capital strength will intensify the competition for grabbing a sizeable market share in the quarters ahead.
Given an all-time high capital level, mergers and acquisitions are arresting attention of late. While these should help curb competition, consolidations should enhance insurers' portfolio.
Robust reserves, all-time high capital level, focus to boost the top line while improving the bottom line should help insurers emerge winners going ahead.
Stocks Trading Cheap
Year to date, the insurance industry has declined 6.9% compared with the S&P 500 index's gain of 2.6%.
However, given a favorable operating backdrop and solid fundamentals of the industry, it seems apt to add insurance stocks to investors' portfolio now as the valuation looks cheap now. Price-to-book ratio (P/BV), the most appropriate multiple for valuing insurers because of large variations in their earnings results from one quarter to the next, is 2.15, lower than the S&P 500 index's 3.85 as well as the Finance sector's reading of 2.47.
Stocks to Add to Portfolio
With the help of our Zacks Stock Screener , we shortlisted an array of insurance stocks with a bullish Zacks Rank supported by upward estimate revisions over the last 60 days and an impressive Value Score of A or B. Value Score helps identify companies that are undervalued. This deviation from their fair value is what creates an exceptional upside opportunity. Also, back-tested results have shown that stocks with a favorable Style Score of A or B coupled with a solid Zacks Rank are the best investment bets on offer.
Top-Ranked Insurance Stocks to Enhance Portfolio in 2H: Progressive Corp (PGR)
Headquartered in Mayfield Village, OH, Progressive (NYSE: PGR ) provides personal and commercial auto insurance, residential property insurance plus other specialty property-casualty insurance and related services, primarily in the United States.
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Zacks Rank #1
The Zacks Consensus Estimate for 2018 bottom line has been raised 3.3%.
The consensus estimate for current-year earnings reflects a 60.1% year-over-year surge on 19.1% higher revenues.
Value Score of B
Top-Ranked Insurance Stocks to Enhance Portfolio in 2H: Everest Re Group Ltd (RE)
Based in Hamilton, Bermuda, Everest Re Group (NYSE: RE ) provides reinsurance and insurance products.
Zacks Rank #2 (Buy)
The Zacks Consensus Estimate for this year has been revised 1.7% upward.
The Zacks Consensus Estimate for 2018 earnings represents a skyrocketing 126.7% year-over-year increase on 13.1% higher revenues.
Value Score of A
Top-Ranked Insurance Stocks to Enhance Portfolio in 2H: Lincoln National Corporation (LNC)
Radnor, PA-based Lincoln National (NYSE: LNC ) operates multiple insurance and retirement businesses in the United States.
Zacks Rank of 2
The Zacks Consensus Estimate for the ongoing year has been moved 1.7% north.
The consensus mark for 2018 EPS translates into an 8.2% year-over-year rise on 10.8% higher revenues.
Value Score of A
Top-Ranked Insurance Stocks to Enhance Portfolio in 2H: Assurant, Inc. (AIZ)
Based in New York, NY, Assurant (NYSE: AIZ ) provides risk management solutions to housing and lifestyle markets in North America, Latin America, Europe and the Asia Pacific.
The stock is a Zacks #2 Ranked player.
The Zacks Consensus Estimate for 2018 has been raised 1.1%.
The Zacks Consensus Estimate for 2018 bottom line depicts substantial 91.7% year-over-year growth on 22.6% higher revenues.
Value Score of B
Top-Ranked Insurance Stocks to Enhance Portfolio in 2H: Hartford Financial Services Group Inc (HIG)
Hartford, CT-based Hartford Financial (NYSE: HIG ) provides insurance and financial services to individual and business customers in the United States.
The stock is a #2 Ranked player.
The Zacks Consensus Estimate for 2018 has been moved 0.3% up.
The Zacks Consensus Estimate for 2018 EPS soared 68.3% year over year.
Value Score of B
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