The insurance industry that suffered in 2020 due to the pandemic has done well so far this year. The industry has gained 9% year to date compared with the Finance sector’s increase of 19.9% and the Zacks S&P 500 composite’s rise of 25%. Reopening of the economy, increased vaccinations, and an encouraging economic growth outlook instill confidence in the industry. However, concerns over the new virus variant loom large.
Though the insurance industry is yet to outperform the broader sector, shares of Athene Holdings ATH, ProAssurance Corporation PRA and Fidelity National Financial FNF have outperformed the industry, the sector and the S&P 500 composite year to date. These stocks are poised to retain the rally given solid prospects.
Factors at Play
Exposure to catastrophe losses affect underwriting profitability of property and casualty insurers. Nonetheless, the insurers are witnessing continued price hikes. Continued improvement in pricing should support premium growth. Per Deloitte Insights, life insurance premium is estimated to increase 4% while non-life insurance premium is expected to increase 3.7% in 2022.
Per Marsh, global commercial insurance prices increased 15% in the third quarter, which marked the 16th straight quarter of price increase. According to Willis Towers Watson’s 2021 Insurance Marketplace Realities report, except for one, 29 lines of business are expected to witness price rise this year. Per Willis Towers Watson’s 2022 Insurance Marketplace Realities, rates will continue to rise but by a small margin. Nonetheless, cyber liability and fiduciary liability insurance should continue to witness a steep rate rise per the report. The report stated that 24 lines of business will witness a rate rise while eight business lines will have mixed/flat rates.
The life insurance business should benefit from increased awareness about the pandemic and lower mortality rates as the pandemic slowly recedes and vaccination programs increase
Investment income, an important component of an insurer’s top line, is impacted by the movement in interest rate. Given the low rates, the industry players are directing their funds into alternative investments like private equity, hedge funds, and real estate to cushion investment income. However, with possibility of a rate increase next year, insurers are poised to benefit as they are beneficiaries of a rising rate environment
Digitalization has increased with companies gathering strength to operate amid pandemic-induced restrictions. Increased adoption of technologies like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing, and robotic process automation aids in seamless underwriting and claims processing, improving operational efficiency. Per Deloitte Insights, the technology budget is projected to increase 13.7% in 2022.
Given a solid capital level, industry players are continually pursuing strategic mergers and acquisition to gain market share, grow in their niche areas and diversify operations. Per Deloitte Insights, the insurance industry witnessed 197 consolidations in the first half of 2021 itself, almost in line with the full-year 2020 figure.
Solid Picks for Better Returns
With the help of the Zacks Stock Screener, we have selected three insurance stocks with an impressive VGM Score of A or B. Each of these stocks carries a Zacks Rank #2 (Buy). Back- tested results have shown that for stocks with a solid VGM Score and a favorable Zacks Rank, the returns are even better.
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These stocks have also witnessed positive estimate revisions in the past 30 days, reflecting analysts’ confidence in the companies’ operational efficiency.
Bermuda-based Athene Holdings offers various insurance and reinsurance retirement products across the United States and Bermuda. The life insurer has been boosting premiums by enhancing existing products and services suite through three organic channels — retail, flow reinsurance and institutional. Athene also continues to reinsure a diverse range of fixed annuities and institutional products. These efforts are aimed at capitalizing on the U.S. retirement market, which comprises a large number of retirees.
Athene expects healthy organic growth to continue and thus estimates total organic inflows to be about $35 billion in 2021.
Athene boasts an impressive inorganic growth, which has been driven by several buyouts and block reinsurance transactions with several companies. It expects the inorganic growth channel to continue being an important driver in the future.
Athene exited the third quarter of 2021 with excess equity capital of $3.6 billion and $18.9 billion of regulatory capital. It has total deployable capital of $8 billion that can support more than $100 billion of additional inorganic growth.
Shares of Athene have rallied 89.9% year to date.
Birmingham, AL-based ProAssurance Corporation provides professional liability insurance products primarily to physicians, dentists, other healthcare providers and healthcare facilities through its subsidiaries. ProAssurance has significantly strengthened its position in the workers’ compensation market while intensifying its focus on Medical Professional Liability Insurance and enhancing its size and scale in the MPLI space. ProAssurance boasts the nation’s third-largest specialty writer of liability insurance for healthcare professionals and facilities.
Higher new business written and strong retention rates should continue to drive premium revenues for ProAssurance. The NORCAL buyout continues to contribute a significant portion to total gross premiums written. Initiatives to lower overall costs are bolstering its operating margins and improving the expense ratio.
As of Sep 30, 2021, ProAssurance had cash and cash equivalents of $203 million, a revolving credit facility of up to $250 million and the possibility of a $50-million accordion feature. The dividend yield of 0.9% remains higher than the industry’s figure of 0.4%.
Shares of ProAssurance have gained 29.3% year to date.
Jacksonville, FL-based Fidelity National Financial provides various insurance products in the United States.
Being the nation’s largest title insurance and settlement services company, Fidelity National has leading market share in the residential purchase, refinance, and commercial markets and industry-leading margins.
Fidelity National should continue to witness momentum in refinance volumes, strong purchase demand and rebound in commercial real estate activity given the still low-rate environment.
Riding on a solid capital position, Fidelity National has been hiking dividends for the last 10 years. Its dividend yield of 3.3% remains higher than the industry’s figure of 0.4%.
Shares of Fidelity National have gained 25.2% year to date.
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