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Invest in These 4 Insurance Stocks Ahead of Q4 Earnings


The fourth-quarter earnings season has kicked off with 21 of the elite S&P 500 index members having already reported results. Earnings of these companies grew 34.3% on 71.4% higher revenues per the Earnings Outlook.

The Finance sector has kick-started its earnings on Jan 12. Earnings are expected to increase 2.8% on 2.4% higher revenues. This is an improvement from the preceding quarter’s performance as the third quarter was impacted by soft performance from the insurance industry due to a series of hurricanes that was devastating.

A Silver Lining in the Cloud

However, the fourth quarter was not as badly affected as the third quarter. Though the period is estimated to suffer due to California wildfires, the magnitude is softer than that of Hurricane Harvey, which wreaked havoc last August, followed by Irma and Maria as well as the Mexican earthquakes. Per a report released by The California Department of Insurance, insurance claims have crossed $9.4 billion while catastrophe modeling firm AIR Worldwide estimated that the loss could be about $10.5 billion.

Nonetheless, insurers, having already suffered the bruise in the third quarter are likely to have weathered the fourth quarter cat loss too. Nevertheless, underwriting profitability must have suffered due to the Californian wildfires.

Though increasing catastrophes will induce fluctuation in the underwriting results, insurers have braced themselves with prudent underwriting practices to withstand the loss to some extent.

Also, insurers have braved some rate hikes that have remained flat for quite some time due to a not-so-active catastrophe environment.

Improving Rate Environment

Amid bad news, there are reasons for insurers to cheer. The Fed kept its promise for three rate hikes in 2017. Since December 2016, four rate hikes have been made and the interest rate now stands at 1.25-1.50%. Also, the outgoing Fed chairperson Janet Yellen reiterated the expectation to raise rates thrice in 2018 and twice in 2019. Owing to a gradually improving rate environment, investment results have also markedly improved from the historical lows.

Tax Reforms

President Donald Trump has signed the Tax Cuts and Jobs Act into law on Dec 22, 2017. The tax reform policy, an overhaul of the tax code after 31 years lowers the corporate tax burden to 20% from 35%. This move is likely act as an impetus, aiding margin expansion. Per the Earnings Outlook, estimates for 2018 and 2019 have started moving north with the expected 2018 earnings growth going up by two points since the law’s enactment.

However, due to reduction in tax rates, insurers are writing down deferred tax assets that in turn will adversely impact their risk-based capitalization levels and also reduce net income.

Encouraging Economic Data

An improving employment situation, inflation approaching 2%, easing of the U.S. dollar and a momentum in oil prices point toward a better economic scenario.

Fed officials expect unemployment to decline to 3.9% in 2018 and 2019. GDP is predicted to grow at 2.5% in 2018 and 23.1% in 2019. Inflation rate is estimated at 1.9% in 2018 and 2% in 2019.

A reviving housing market is expected to boost insurable exposures and premiums written. Stronger corporate bonds and an improving real estate market might help curtail the credit-related investment loss.

Price Performance

The insurance industry has scored better than the S&P 500 index since the onset of the fourth quarter, riding on core strength and a favorable macro environment. While the industry has gained 7.1%, the elite index has risen 5.5%.

Industry Rank

The Insurance industry is further divided into five components and all of them fall within the top half (industries with the best average Zacks Rank) of the the Zacks Industry Rank.

Life at #36, Accident & Health at #51, Property and Casualty at #65, Multiline is ranked at #73, Brokerage at #76, all fall in the top slot.

Stocks to Consider

Strategic initiatives to have a diversified portfolio, mergers and consolidation to accelerate growth and expand globally, prudent underwriting, capital influx and an effective capital deployment to enhance shareholders’ value position insurers on a solid base against all odds.

With the help of the Zacks Stock Screener, we shortlisted four insurance stocks carrying a bullish Zacks Rank, a solid Growth Score, witnessing upward estimate revisions over the last 30 days and boasting long-term earnings growth of at least 7%. Shares of these companies have also gained more than 5% over the last 12 weeks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Progressive Corporation PGR provides personal and commercial property-casualty insurance and other specialty property-casualty insurance and related services, primarily in the United States.

Zacks Rank #1

Growth Score of B

LTG: 12.2%

The Zacks Consensus Estimate for 2018 has been raised 8.1%

3-Month Price Gain: 15.78%

Cigna Corporation CI provides insurance and related products and services in the United States and internationally

Zacks Rank of 2

Growth Score of A

LTG: 12.7%

The Zacks Consensus Estimate for 2018 has been raised 1.4%

3-Month Price Gain: 9.4%

Selective Insurance Group, Inc. SIGI provides insurance products and services in the United States.

Zacks Rank of 2

Growth Score of B

LTG: 17.7%

The Zacks Consensus Estimate for 2018 has been raised 15.6%

3-Month Price Gain: 6.4%

Brighthouse Financial, Inc. BHF provides life insurance and annuity solutions in the United States.

Zacks Rank of 2

Growth Score of B

LTG: 13.3%

The Zacks Consensus Estimate for 2018 has been raised 8.5%

3-Month Price Gain: 5.4%

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