The U.S. Insurance Industry faced challenges in 2017 that put pressure on the deal-making environment to a large extent. Starting from a tepid economic environment to extremely unpredictable weather conditions, the insurance industry bore the brunt of all. Despite these trials, the industry still managed to complete 350 mergers and acquisitions (M&A) in the year per a report by the London-based law, firm Clyde &Co. Even though the above-mentioned deal volume was considerably lower than the previous year, the same is anticipated to rise in 2018.
Interestingly, the last couple of years has set the stage for insurers to take an aggressive and positive approach toward the deal-making environment in 2018, mainly driven by an evolving industry and M&A environment.
With the gradually stabilizing economy and rising interest rates along with a buoyed investor and consumer confidence, the insurance industry has been putting in conscious efforts to complete a greater number of consolidations this year. This in turn will also help insurers achieve strategic objectives, more so because the M&A route essentially paves the way for attaining growth. Driving Factors for a Positive M&A Landscape
The recent tax reform, effective Jan 1, 2018, reducing the tax rate to 21% from 35% and thus calling for a $1.5-trillion tax cut, is expected to benefit the insurance industry to a large extent. Besides redesigning taxation to make U.S. insurers more competitive globally, the tax overhaul provides a few changes to make the M&A environment more conducive.
Further, technology will provide an impetus to insurers to likely drive M&A growth in 2018. Technology will also help the insurance companies develop new products, enhance client base and loyalty, boost distribution strategies as well as propel efficiencies. Considering the strategic need for technology investments, InsurTech has risen to prominence in the industry. Hence, acquiring technology assets is set to be a tactical driver for deals in 2018, despite the small size of such deals.
On the back of continued capital inflow, the insurance industry's available capital resource remains at an all-time high, which has helped insurers build a strong liquidity profile. A robust capital position will lend enough support to insurers to pursue bigger and important deals in the near term, also keeping the industry's growth trend alive.
Also, with the probability of alternative sources of capital flowing into new areas, beyond the traditional business lines, there will be additional pressure on pricing leading to some businesses available for sale.
Additionally, divesting noncore assets for competitive and regulatory concerns, is being considered by many insurers. Through this process, the strategies of such companies will come into focus, resulting in shedding of more business lines this year. A Few Noteworthy Deals So Far This Year
The insurance industry witnessed some high-profile deals being announced and accomplished in the past couple of months. For instance, on Jan 22, 2018, American International Group, Inc. AIG
decided to buy reinsurer Validus Holdings, Ltd. (VR) for $5.6 billion in cash. The buyout is anticipated to be immediately accretive to American International Group's earnings and return on equity (ROE).
This apart, a milestone decision was taken by AXA Group on Mar 5, 2018 to acquire 100% of XL Group Ltd XL
for $15.3 billion and creating the leading global property and casualty (P&C) Commercial lines insurer based on gross written premiums.
Another such deal refers to Fidelity National Financial, Inc.'s agreement FNF
to acquire Stewart Information Services Corporation (STC) for $1.2 billion in a cash-stock deal on Mar 19, 2018. The transaction is expected to culminate in the first or second quarter of 2019, subject to closing conditions. Stocks in Focus
The insurance industry is pretty certain that the M&A activity will be back in form this year, mostly attributable to the factors discussed above as well the concerns regarding a soft economic climate and fast-changing regulations starting to diminish.
We have zeroed in on four outperforming stocks in the thriving insurance industry with a promise to generate better returns despite all odds based on price performance, positive estimate revisions, a favorable Zacks Rank and an impressive Growth Score
of A or B. Our research shows that stocks with Growth Scores of A or B combined with a bullish Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best investment opportunities.
Birmingham, AL-based Infinity Property and Casualty Corporation IPCC
provides personal auto insurance products in the United States. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 0.8% upward to $5.95 over the last 60 days. The upward estimate revision is evident from the company's Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here
The stock has a Growth Score of B and has rallied 10.7% compared with the industry 's growth of 3.4% year to date.
Rolling Meadows, IL-based Arthur J. Gallagher & Co. AJG provides insurance brokerage, consulting, and third party claims settlement and administration services to entities in the United States and internationally. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 6.2% upward to $3.58 over the last 60 days. This positivity is reflected through the company's Zacks Rank of 2.
The stock has a Growth Score of B and has gained 8.3% compared with the industry 's increase of 6.8% year to date.
West Des Moines, IA-based American Equity Investment Life Holding Company AEL provides life insurance products and services in the United States. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 11.5% upward to $3.40 over the last 60 days. This upside bears testimony to the company being a Zacks #1 Ranked player.
The stock has a Growth Score of B and has gained 1.0% compared with the industry 's decrease of 5.2% year to date.
Santa Ana, CA-based First American Financial Corporation FAF provides financial services. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 17.8% upward to $4.44 over the last 60 days. The company is a #2 Ranked player.
The stock has a Growth Score of B and has climbed 5.5% compared with the industry's gain of 3.3% year to date.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Arthur J. Gallagher & Co. (AJG): Free Stock Analysis Report American Equity Investment Life Holding Company (AEL): Free Stock Analysis Report American International Group, Inc. (AIG): Free Stock Analysis Report XL Group Ltd. (XL): Free Stock Analysis Report First American Corporation (The) (FAF): Free Stock Analysis Report Fidelity National Financial, Inc. (FNF): Free Stock Analysis Report Infinity Property and Casualty Corporation (IPCC): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research