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4 Insurance Bets for Safe Returns Amid Hurricane Concern

Zacks

Hurricane Florence brings back memories of last year’s devastation when a host of hurricanes wreaked havoc in parts of the United States. A hurricane season typically starts in June and lasts through November during a year, gathering strength in August and September. Colorado State University has predicted a below-normal season this year with a total of 12 named storms, 5 hurricanes and 1 major hurricane.

The third quarter of a year generally bears the brunt of unprecedented catastrophes, which cause mass devastation. This August, Hurricane Lane ripped through Hawaii but its intensity subsided to a Category 3. Hurricane Florence has also been downgraded to a Category 2 as it approaches the East Coast per National Hurricane Center. Catastrophe modeller Risk Management Solutions estimated insured losses in the range of $15-$20 billion, stemming from Hurricane Florence.

Though Florence has been downgraded, yet destruction and its aftermath are expected to be massive. Per National Hurricane Center's projected track, Florence has shifted somewhat south and west and could be the costliest storm ever to hit the nation. Georgia, alongside North Carolina and South Carolina expected to be worst hit.

An analyst at Citigroup noted that North Carolina has the highest property and casualty insured premiums among the three states with $16 billion followed by Virginia at $13.6 billion and South Carolina at $9.5 billion. The analyst projects Travelers to incur losses of roughly $42 million for each $1 billion in insured losses followed by Allstate at $37 million, Chubb at $25 million and Progressive at $21 million.

The U.S. property and casualty insurance industry suffered net underwriting loss of $29.3 billion in 2017, wider than $5.5 billion loss incurred in 2016 according to A.M. Best. Unprecedented landfall of hurricanes Harvey, Irma, Jose, Maria together made 2017 the costliest year in term of catastrophe loss.

However, combined ratio — a measure of underwriting profitability — is estimated to be 99% for 2018, an improvement of 450 basis points year over year, per S&P Global Market Intelligence.

Though catastrophes appear as haunting as nightmares, due to losses incurred by insurers induce price hikes to ensure uninterrupted claims payment. After witnessing 19 back-to-back quarters of soft pricing market, insurers have started to increase prices from the fourth quarter of 2018. According to Willis Towers Watson plc’s Commercial Lines Insurance Pricing Survey, commercial insurance prices in the United States increased nearly 3% in the second quarter of 2018. This marks the third consecutive quarter of price rise.

Per the survey, price increased across commercial auto (double digits increase for the third straight quarter), commercial property (low- to mid-single digits increase for the third consecutive quarter) and excess/umbrella liability.

Property and casualty insurers are also taking reinsurance covers to safeguard their profitability.

Insurers need to brace themselves with sufficient fund to address huge claims arising due to calamities. The main challenge lies in settling claims smoothly without affecting their own financials. Due to a not-so-active catastrophe environment, the insurers could build reserves over the last several quarters. We expect such capital accumulation to help insurers meet the claims and yet at the same time, save them from buckling under the burden.

The industry is currently ranked at #69, representing the top 27% of Zacks Industry Ranks. It has also outperformed the Zacks S&P 500 Composite quarter to date, the period marking the peak hurricane season. While the industry has rallied 13%, Zacks S&P 500 Composite has increased 6.1%.



Stock Picks

Despite the losses resulting from catastrophe events, the property and casualty insurance industry is poised well, banking on factors like improving interest rate environment, lower tax burden, better premiums, prudent underwriting practices, improving employment and growth in GDP.

It might be an uphill task to pick the right stocks for greater investment rewards amid worries related to natural disasters. Here comes our handy Zacks Stock Screener to help identify the best bets.

We shortlisted four stocks backed by a Zacks Rank #2 (Buy) and an impressive VGM Score. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cincinnati, OH-based American Financial Group, Inc. AFG provides property and casualty insurance products in the United States. The stock carries a VGM Score of B.

Fort Worth, TX-based Hallmark Financial Services, Inc. HALL underwrites, markets, distributes and services property/casualty insurance products to businesses and individuals in the United States. The stock carries a VGM Score of A.

Headquartered in Branchville, NJ, Selective Insurance Group, Inc. SIGI provides insurance products and services in the United States. The stock carries a VGM Score of A.

Worcester, MA-domiciled The Hanover Insurance Group, Inc. THG provides various property and casualty insurance products and services in the United States and internationally. The stock carries a VGM Score of A.

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