Allstate CorporationALL shares plunged 9.8% in the two trading sessions following the release of its second-quarter earnings, which missed the Zacks Consensus Estimate widely by 33%. The property and casualty insurer with a market capital of $25.5 billion, suffered on account of high claims on auto policies.
Elevated auto claims left Allstate's core property and liability business to suffer an underwriting loss of $10 million. Allstate President Matt Winter tried to calm the jittery investors by saying,"We are broadly increasing rates to catch up, and then keep pace, with increased loss costs."
Though this insurance major disappointed its investors, we are spoilt for choice when it comes to playing the insurance industry, thanks to its continuing favorable trends. We highlight them below:
Consolidation: The industry is witnessing consolidations, with raging mergers and acquisitions. Bloomberg noted that the insurance industry has lately been thriving on an M&A spree and that it has not seen such extravaganza in the last 12 years.
Mergers and acquisitions will continue to be the primary source of growth in the insurance sector in 2015. Since organic growth seems hard to come by, players are seeking inorganic ways to expand and thrive. Consolidation has been fueled by a tough competitive environment which necessitates players to gain size and economies of scale.
To insulate against waning premiums, gain competitive edge, brace up offerings (both by diversification and adding capabilities), and expand ones geographical footprint, insurers find consolidation as the optimum solution.
Anticipated Rake Hike: Insurers are also set to gain from an interest rate hike expected by the end of this year. This is because insurers are the direct beneficiaries of higher rates in the insurance industry. This is because they take in premiums from customers, invest them -- usually in fixed income securities -- and then pay out claims in the future.
As the Fed raises the key rate, bonds yields will increase across the board. Insurers can then invest their premiums and get higher yields. The increased investment income thus generated will boost profits.
Lower Catastrophe: The insurance industry has also escaped Mother Nature's wrath this year. Munich Reinsurance Co. reported that insured losses from natural catastrophes totaled about $12 billion in the first half of 2015, lower than the long-term average of $15 billion. This makes it the lightest catastrophe-ridden period since the first half of 2010. Lower claims have left insurers with fatter reserves and capital balance enabling them to venture into new lines of businesses and try out mergers and acquisitions.
Given these favorable trends we pick out some players with a favorable Zacks Rank that can enhance one's investment portfolio returns. Each of these trusted stocks are poised for profit growth this year and over the long term.
First American Financial Corp.FAF
First American Financial carries a Zacks Rank #1 (Strong Buy). This property and casualty insurer has reported EPS growth of 27.7% in the recently reported quarter and has witnessed an 8.33% upside revision in 2015 earnings guidance. The company, through its subsidiaries, provides financial services. It operates through Title Insurance and Services, and Specialty Insurance segments. The company's long term EPS growth rate is 10.15%.
The company carries a Zacks Rank #2 (Buy) and boasts superior capitalization, improved operating profitability over the years and an excellent business profile as one of the leading specialty property/casualty insurance organizations in the United States. The insurer reported EPS growth of 37.5% in the just reported quarter and has witnessed a 6.55% upside revision in 2015 earnings projection.
Cincinnati Financial Corp.CINF
This insurer reported EPS growth of 118.42% in the just reported quarter and has witnessed a 17% upside revision in the 2015 earnings estimate. Cincinnati Financial is among the 25 largest property& casualty insurers in the nation, based on net written premiums. The company has always been known for its operating efficiency. Cincinnati Financial's strong agent base, a history of favorable reserve release and a 55-year track record of consistently increasing dividend makes it stand out among its peers.
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