The Zacks Property and Casualty Insurance industry has performed well so far this year, banking on better pricing, increased exposure, prudent underwriting, streamlined operations, global presence and a solid capital position. The industry has gained 32.1% year to date, outperforming the Finance sector's rise of 15.1% and the Zacks S&P 500 composite's increase of 18.4%. The group's Zacks Industry Rank places it in the top 10% of more than 250 Zacks industries and earnings estimates for the current year have increased 12.4% year over year.
However, after seven years of increase, the industry has been witnessing flat pricing. Also, the prospect of an interest rate cut by the Fed this month adds pressure.
Despite the challenges, Heritage Insurance Holdings, Inc. HRTG, Arch Capital Group Ltd. ACGL, AXIS Capital Holdings Limited AXS and NMI Holdings, Inc. NMIH are poised to do well and are strong contenders for addition to one's portfolio for better returns. These insurers have outperformed the industry year to date and are poised to retain the rally given their solid prospects.
Industry Outperformers
Image Source: Zacks Investment Research
Flat Pricing in Q2
After 26 straight quarters of year-over-year rise, pricing stayed flat in the second quarter of 2024. Per Marsh's Global Insurance Market Index, pricing declined 1% sequentially. Per Marsh, the continued moderation of rates was largely due to increasing competition among insurers in the global property market, as published in Insurance Journal.
Per Marsh, region-wise, "on average, Q2 rates decreased by 5% in Canada and the Pacific, and by 3% in the UK and in Asia regions. Rates increased in the US and Europe by 1%, and by 4% in the Latin America and the Caribbean and India, Middle East, and Africa (IMEA) regions."
Business line wise, property insurance rates globally were flat, casualty lines rates increased 3% globally, while global financial and professional lines (FinPro) rates decreased 5% globally for the eighth consecutive quarter. Cyber insurance rates decreased 6% globally.
Pricing, a crucial underwriting action, plays an important part in driving premiums and addressing claims payment prudently, thus benefiting underwriting profitability.
Per Deloitte Insights, gross premiums are estimated to increase sixfold to $722 billion by 2030. China and North America should account for more than two-thirds of the global market, per the report. Analysts at Swiss Re Institute predict premiums to grow 7% in 2024 and 4.5% in 2025.
Interest Rate Cut in the Cards?
After 11 rate hikes since March 2022, a rate cut in September FOMC seems inevitable as inflation approaches the target of 2% and on stable employment and improved retail sales data.
The current interest rate of 5.25%-5.5% marks the highest level in more than two decades.
Fed Chairman Jerome Powell at Jackson Hole stated, "The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
Rates were last raised by 25 basis points in July 2023.
Per a report published in The Guardian, based on trading in financial markets, investors see about a 76% chance of a 25-basis point cut in interest rates in September.
Insurers are direct beneficiaries of a rising rate environment. They invest a portion of their premiums. Long-tail insurers tend to gain more from rising rates as they have more time to invest their premiums and earn a higher rate of return.
As far as commercial insurers are concerned, low interest rates can make it difficult for them to maintain adequate reserves for long-tail liabilities. This can lead to increased volatility in claims reserve.
Stocks to Bet On
With the help of the Zacks Stock Screener, we have selected five P&C insurers that have an impressive Value Score of A or B. Each of these stocks either carries a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). Back-tested results have shown that stocks with a solid Value Score and a favorable Zacks Rank are the most attractive and their returns are better.
Heritage Insurance: Tampa, FL-based HRTG provides personal and commercial residential insurance products. Its focus on rate adequacy, selective underwriting and profit-oriented underwriting criteria while restricting new business in over-concentrated markets or products poises it well for growth. This Zacks Rank #1 insurer has strategically diversified its portfolio to achieve better risk distribution, claims trends and lower reinsurance costs.
The Zacks Consensus Estimate for HRTG's 2024 and 2025 earnings suggests 10.3% and 18.1% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 has moved up 33.1% and 26.7%, respectively, in the past 30 days.
The stock currently has a P/B ratio of 1.94. It has a Value Score of A.
Arch Capital Group: Pembroke, Bermuda-based Arch Capital is a leading specialty P&C and mortgage insurer and is poised to gain from new business opportunities, rate improvement, growth in existing accounts and a solid capital position. Widespread operations coupled with a compelling product portfolio provide meaningful diversification and earnings stability to this Zacks Rank #2 insurer. Its international expansion strengthens operational capabilities while diversifying business at attractive risk-adjusted returns.
The Zacks Consensus Estimate for ACGL's 2024 and 2025 earnings suggests 6.6% and 2.5% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 earnings has moved 1.3% and 0.4% north in the past 30 days. The expected long-term earnings growth rate is 6.1%.
The stock currently has a P/B ratio of 2.14. It has a Value Score of B.
Axis Capital Holdings: Bermuda-based Axis Capital focuses on growth areas, including wholesale insurance and lower middle markets, deploying resources prudently while enhancing efficiencies and improving its portfolio mix and underwriting profitability. AXIS Capital is also working with its distribution partners to use expanding digital capabilities to create new business growth in desirable smaller accounts. AXS, aiming for leadership in specialty risks, has an impressive dividend history. It has hiked dividends for 18 straight years and boasts one of the highest dividend yields among its peers. It sports a Zacks Rank #1.
The Zacks Consensus Estimate for AXS' 2024 and 2025 earnings suggests 8.6% and 8.4% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 has moved up 1.7% and 1.8%, respectively, in the past 30 days. The expected long-term earnings growth rate is pegged at 27.8%, better than the industry average of 11%.
The stock currently has a P/B ratio of 1.32. It has a Value Score of A.
NMI Holdings: Headquartered in Emeryville, CA, NMIH provides private mortgage insurance through its wholly-owned insurance subsidiaries in the United States. Improving mortgage insurance portfolio, higher new insurance written volume, a comprehensive reinsurance program and a solid capital position poise the insurer well for growth. The expected long-term earnings growth rate is pegged at 9.8%. This Zacks Rank #2 insurer generates solid mid-teens shareholders' returns.
The Zacks Consensus Estimate for NMIH's 2024 and 2025 earnings suggests 8.6% and 8.4% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 has moved up 1.4% and 1.1%, respectively, in the past 30 days. The expected long-term earnings growth rate is pegged at 9.8%.
The stock currently has a P/B ratio of 1.6. It has a Value Score of B.
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