Insurance Companies ready to Claim Positive Earnings Surprises in Q4. - Earnings ESP

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With third-quarter 2013 results underway, the U.S. property-casualty (P&C) or the non-life insurance industry has witnessed some recovery in net premiums written, owing to the improvement in premium rates and hardening of markets in the past 3−4 quarters. Improved efficiencies and increased focus on strengthening direct distribution networks and channels also boosted the policies-in-force and stabilized the underwriting cycle.

This improvement is impressive, particularly as it comes after a persistently long period of weakness. The progress was supported by favorable reserve development and lower catastrophe losses for the insurers, signaling a better combined ratio. These positives are also reflected by the growth in top line and margins achieved by most sector participants. In fact, the U.S. P&C industry has posted profits in the first half of 2013, an achievement consistently carried forward since 2007. Stable results in the third-quarter further elucidate this sustained momentum.

However, low interest rates continue to deter investment yields among the P&C insurers. This is because more than 60% of their investment portfolio comprises bonds, which are extremely sensitive to credit markets and are also performing weakly. While lower returns from investments and unrealized gains have impelled the insurers to put a tight lid on expenses, bottom-line results still lack consistency.

Hence, it is a good idea to check out the potential of a handful of P&C insurance stocks that can outperform their peers, and thereby warrant investors' confidence and price appreciation.

How to Pick the Right Stock?

Picking the most worthy stocks within the huge P&C insurance industry could be akin to finding a needle in the haystack. Once coherent way is the selection of those stocks that have a perfect blend of a favorable Zacks Rank - a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) - and a positive Zacks Earnings ESP .

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

For investors seeking to apply this strategy to their portfolio, we present 3 P&C insurance stocks that may be the potential growth riders this week:

RenaissanceRe Holdings Ltd. ( RNR ) carries a Zacks Rank #2 (Buy) with an earnings ESP of +4.74%. The Zacks Consensus Estimate for third quarter 2013 is $2.32 per share.

With an average earnings surprise of +19.51% over the trailing 12 months, this company's strength lies in its business expansion strategies, focus on core operations and premium growth. A healthy balance sheet with higher shareholder equity and lower debt further looks promising.

Headquartered in Hamilton, Bermuda, RenaissanceRe primarily provides P&C reinsurance as well as specialty reinsurance coverage on accident, health, aviation and satellite concerns, as well as homeowners insurance in various parts of the U.S.

Meadowbrook Insurance Group Inc. ( MIG ) is a Zacks rank #3 (Hold) stock and has an earnings ESP of +7.69%. The Zacks Consensus Estimate for the third quarter is pegged at 13 cents per share. This insurer boasts of a strong statutory surplus and expects improved underwriting results to boost performance outcome in the second half of 2013.

Headquartered in Southfield, Michigan, Meadowbrook Insurance primarily deals in specialty P&C insurance underwriting and other insurance administration services related to professional and general liability.

HCI Group Inc. ( HCI ) is another stock that sports a Zacks Rank #3 stock with a significant earnings ESP of +31.3%. The Zacks Consensus Estimate for the third quarter stands at 67 cents per share. The company's strong operating leverage have not only strengthened balance sheet and cash flows but also supported the 22.2% dividend hike announced last month.

Headquartered in Tampa, Florida, HCI Group is a leading P&C insurer in Florida. The company was formerly known as Homeowners Choice, Inc. It changed its name to HCI Group, Inc. in May 2013.

- All the three stocks discussed above are scheduled to announce their third quarter results after the closing bell on Nov 5 .

What Lies Ahead?

While uncertainty from weather-related events and poor investment yields, amid lack of strong growth catalysts, continue to restrict significant upside in the near term, we believe that the consistency in improved premiums and underwriting discipline should continue to boost investors' momentum in this sector. Moreover, strong potential for growth underlies once the markets recover to garner higher returns on investments in the long run. For the moment, you can safely rely on the industry outperformers that still boast of earnings strength.

HCI GROUP INC (HCI): Free Stock Analysis Report

MEADOWBROOK INS (MIG): Free Stock Analysis Report

RENAISSANCERE (RNR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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