As the year 2018 set in, the insurance industry started to witness the wheel of fortune turning in its favor with the rising interest rates, improving economy, lower-than-expected catastrophe loss (as compared to 2017, which emerged as the costliest year in terms of catastrophe loss) as well as a noteworthy tax reform effective Jan 1, 2018. Hence, the industry is anticipated to deliver better-than-expected results and continue the momentum in the near term as well.
Even though the insurers will be faced with challenges to counter in 2018, their primary focus remains on achieving two important objectives — top-line sales growth while bolstering bottom-line profitability.
Some of the concerns such as weather-related events and political turmoil are beyond the insurers’ control. Despite these trials, we expect some insurers to generate desirable results and keep the optimism alive among investors on the stock.
Here, we will talk about a few driving factors that might help insurers perform well in the near future, allaying apprehensions among investors.
Rising Interest Rates: Is it a Blessing?
The gradually improving interest rates have been a boon for insurers, who are major beneficiaries of the rising interest rates. The FOMC meeting on Mar 21, 2018, which also marked Jerome Powell’s first Fed meeting as chairman, further strengthened the insurers’ confidence in the regulatory body’s promise to deliver three rate hikes in 2018. The first hike announced at the meeting has put the current interest rate in the range of 1.50–1.75%. In fact, the Fed indicated that there can be a fourth rate raise this year and three more in 2019 (one more than the previously announced two hikes), hinting at an aggressive path of rate hikes.
A progressive rate environment will ultimately benefit the insurance industry with regard to insurers’ investment income (forming a major portion of their revenues), thereby accelerating their overall growth in the future. For instance, life insurance companies will get a relief from the operating pressures, resulting from tight credit spreads that the low-rate environment has exerted for a considerable period of time. Rising interest rates as well as increase in bond yields will provide the required relief to insurers to maintain decent margins.
Better Underwriting Performance: An Ambitious Hope?
Although the California mudslides and the northeast winter storms are likely to impact first-quarter 2018 results with Chubb Limited CB projecting a total catastrophe loss of $305 million after tax, the insurers are not expecting a huge impact on their underwriting results. Thus, the positivity surrounding a better underwriting performance remains intact, despite such massive inclement weather-oriented losses being incurred.
In fact, per a report by Fitch Ratings, the insurance industry is expected to regain substantial underwriting profitability in 2018, albeit at a slower pace, after being badly hit by the unprecedented hurricane activity and earthquakes in 2017. Moreover, combined ratios are likely to improve and might come close to a break-even point.
Capital strength displayed by the insurers will assist them to counter near-term volatility and the effects of adverse events.
Other High Points for a Winning Performance
There are a few other factors poised to boost the insurance industry this year. The unemployment rate is projected at 3.8% in 2018 while the gross domestic product is likely to grow 2.7% (an increase from the earlier estimate of 2.5%). Both represent a bullish economic outlook, further picking pace in the recent months.
This apart, a recovering housing market looks set to enhance insurable exposures and premiums written.
Moreover, the tax cut, which reduced the tax rate to 21% from 35%, is an attractive option for most corporates including insurers, as it will aid the companies’ bottom-line, boosting margins directly.
A strong liquidity profile, attributable to continued capital inflow into the industry, will not only back the insurers to counter near-term volatility and impact of hostile occurrences but will also keep the industry’s growth trend alive.
Key Picks
Despite a slew of headwinds posing a threat to insurers this year, tailwinds like rising interest rate environment, better underwriting results and steadily thriving economy will probably cushion the following stocks to raise the performance bar and yield profits through an underlying strength and business modification.
We have zeroed in on four stocks outperforming despite all odds. We expect these stocks to continue the bull run given positive estimate revisions, a favorable Zacks Rank and an impressive VGM Score of A or B. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best investment opportunities.
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 0.6% upward to $3.59 over the last 60 days. This is reflected through the company’s Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
