Chicago, IL – September 28, 2020 – Today, Zacks Equity Research discusses Insurance – Property & Casualty,including National General Holdings Corp. NGHC,The Progressive Corporation PGR, Arthur J. Gallagher & Co. AJG and American Financial Group, Inc. AFG.
The insurance industry has been bearing the brunt of the coronavirus pandemic, near-zero interest rates, trade tariffs and inflation rate. The industry has declined 17.2% year to date against the S&P 500 composite’s increase of 0.8%.
A low interest rate environment makes insurers prone to interest rate risks. Life insurers, earnings, capital, reserves and liquidity are affected as their earnings are typically derived from the spread between their investment returns and what they credit as interest on insurance policies and products.
A near-zero interest rate is also a concern for long-tail Property and Casualty Insurance providers. The rate environment is expected to remain low in a range of 0-0.25%. No improvement in rates is expected before 2023 as outlined in the September FOMC meeting. Also, investment income, a component of insurers’ top line, is likely to remain under pressure.
P&C or non-life insurers are exposed to catastrophes that induce volatility in underwriting profits. Colorado State University predicts an ‘extremely active Atlantic hurricane season in 2020 and hurricane activity will be about 190% of the average season.’ However, improved pricing (most of the lines are witnessing rate increase), prudent underwriting, favorable reserve development and sturdy capital level should help withstand the blow.
On the other hand, life insurers have been refraining from selling long duration term life insurance, moving away from guaranteed savings products toward protection products of unit-linked savings products in their efforts to maintain sales and profitability.
Social distancing norms have led to increased automation, which is expected to ensure smooth functioning, in turn driving premiums and efficiency. Adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain should help life insurers curb operational costs and aid margin expansion.
Amid the current situation, let’s focus on some low-beta insurance stocks that tend to deliver steady performance irrespective of market conditions.
What is Beta?
Beta indicates the volatility of a particular stock with respect to the market. In other words, beta measures the extent of stock price movement relative to the market.
If a company has a beta of 1, it means that the relative volatility of the stock is the same as that of the market. In the same way, if the stock's beta is greater than 1, then it is more volatile than the market. Conversely, a beta below 1 signifies low volatility.
In a turbulent market, it is advisable to focus on low-beta stocks as these will ensure steady return on investment.
The Winning Strategy
We have used our proprietary Zacks Stock Screener to find out stocks that can deliver steady performance even in times of uncertainty. We have included stocks with beta less than 1 for shortlisting low-risk stocks. But low beta cannot be the only stock selection criterion. So, we have added a few other parameters:
Percentage Change in Price in the Last 12 Weeks greater than 1: This ensures that the stocks saw positive price movement over the last three months.
Average 20 Day Volume greater than 400,000: A substantial trading volume ensures that the stocks are easily tradable.
VGM Score of A or B: The selected stocks have a VGM Score of A or B.
Insurers in Focus
New York, NY-based National General Holdings provides various insurance products and services in the United States, Bermuda, Luxembourg, and Sweden. The Zacks Consensus Estimate for 2020 has moved up 31.6% in the past 60 days and indicates year-over-year growth of 45.8%.
Mayfield, OH-based The Progressive Corp. provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. The expected long-term earnings growth rate is 6.2%. The Zacks Consensus Estimate for 2020 has moved up 5.3% in the past 60 days and indicates year-over-year growth of 1.2%.
Rolling Meadows, IL-based Arthur J. Gallagher provides insurance brokerage, consulting, and third party claims settlement and administration services in the United States, Australia, Bermuda, Canada, the Caribbean, New Zealand, and the United Kingdom. The expected long-term earnings growth rate is 8.4%. The Zacks Consensus Estimate for 2020 has moved up 7.7% in the past 60 days and indicates year-over-year growth of 18.4%.
Cincinnati, OH-based American Financial Group provides property and casualty insurance products in the United States. The company delivered earnings surprise in three of the last four quarters.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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