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Share Name | Share Symbol | Market | Type |
---|---|---|---|
American Safety Insurance Holdings, Ltd. | NYSE:ASI | NYSE | Ordinary Share |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 30.25 | 0.00 | 01:00:00 |
Moreover, life insurers have struggled with low interest rates for years now as they primarily invest in long-term interest earnings assets which were not able to generate sufficient returns to match up their future commitments related to the policies sold to various individuals.
However, the recent rise in the U.S. Treasury yields is expected to change the fate of life insurers. Long-term bond yields finally started rising since the middle of the year, after staying low for a long stretch. As a result, cash flows of life insurers will be invested at higher yields, leading to higher returns and increased profit margins. Moreover, with rising rates, reinvestment risk will be lower.
On the other hand, until the rising trend of interest rates becomes prominent with the continuation of the same for a few quarters, life insurers will have to continue to seek alternative asset classes to optimize return from investments. And the addition of any risky asset class in their investment portfolios with hopes of better yield may result in further losses.
As the industry’s statutory capital level fell sharply during the recession, life insurers will need to optimize their capital levels to address the ensuing challenges. In the short term, traditional sources of capital are expected to fulfill most of what life insurers need in order to stay in good shape. However, non-traditional sources of capital will take years to strengthen financials.
The underlying trends amid a recovering economy indicate stability in the sector over the medium term with respect to credit profile and financial prospects. However, higher-than-average asset losses, primarily resulting from their real estate exposure, will remain a major concern.
Further, the sluggish pace of economic recovery is making it difficult for life insurers to expand their customer base. In fact, insurers are struggling to even retain their existing clientele.
Narrowed disposable income owing to a still high unemployment level and huge credit card debt has made it difficult for Americans to invest in retirement products such as life insurance. Americans, primarily the youth, have significantly reduced expenditures on life insurance products, and are instead choosing alternative investments that promise better returns.
Though the carriers are transforming their products and businesses to make them attractive and profitable for customers, significant improvement in demand is not expected in the near term.
However, rising long-term bond yields would increase investors’ appetite for spread-based products, such as fixed rate annuities.
Currently, the life insurers with favorable Zacks Ranks worth considering include StanCorp Financial Group Inc. (SFG) with a Zacks Rank #1 (Strong Buy), and Lincoln National Corporation (LNC) and Symetra Financial Corporation (SYA) with a Zacks Rank #2 (Buy).
Health Insurers
As U.S. health insurers continuously preparing themselves to comply with the mandates of the health care reform, their financials are beefing up. Broad-based moderation in utilization has been primarily boosting the bottom line of health insurers. Also, increased access to capital and better retention opportunities are helping them grow consistently despite tardy economic growth.
Moreover, the carriers have been witnessing better credit quality in the recent quarters, reflecting a moderate industry risk.
In 2010, the historic health care reform legislation -- The Patient Protection and Affordable Care Act (PPACA) -- was passed by the Congress with the intension of making health care facilities more affordable, preventing private health insurers from continuing with the pre-existing condition clause and at the same time reducing the number of uninsured by bringing in 32 million more people under coverage by 2019.
The legislation had many detractors who contested several of its stated benefits and considered it another entitlement program that the country can ill afford. Finally, in Jun 2012, the U.S. Supreme Court ruled in favor of the reform, rejuvenating the industry by removing major uncertainties. Further, Obama's re-election in Nov 2012 essentially ensured the law's future.
Controversies did not stop in 2013, with many states declining from participating in the new health insurance market and expanding Medicaid -- the public health insurance program for low-income families -- to avoid the additional costs involved in it. So far, less than half the states have approved of the Medicaid expansion.
However, the development so far is expected to significantly reduce the number of uninsured, making the U.S. one of the economically sound countries that guarantees coverage.
While the legislative overhaul brings more regulatory scrutiny for private insurers such as WellPoint Inc. (WLP) and UnitedHealth Group, Inc. (UNH), the net negative effect is expected to be far softer than was initially feared.
Although the full implementation of PPACA will be in 2015, the industry is expected to see gradual changes through the reminder of 2013 and dramatic changes in 2014. While bringing more people under coverage will add prospects for growth, the requirement to reduce health care costs will lead to margin compression.
Also, while the reform will provide more cross-selling opportunities for health insurers, their overall profitability will be limited over the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of bringing more people under the umbrella.
Consequently, substantial growth in industry revenue is not expected until 2015 as insurers will be forced to adjust the benefits to comply with the health care legislation. Among others, providing coverage to everyone regardless of an expensive pre-existing condition would put their top lines at stake.
(Want to know more about the future prospects of health insurers? Read our Health Insurance Stock Outlook).
Property & Casualty Insurers
Market hardening has been the key to improvement for property-casualty insurers in the recent quarters. After struggling with falling prices for years, insurers seem to have finally reached a period of better premium rates. However, property-casualty insurers are still feeling the pressure on their investment portfolios due to the overall interest rate environment which is still low. This has been continuously reducing the capital adequacy of most carriers.
Along with continually improving pricing power, better preparation to withstand catastrophe-related losses should help insurers perform better in the upcoming quarters despite the pressure on investment income.
As property-casualty insurers hold about two-thirds of the invested assets in the form of bonds, their capacity is highly sensitive to changes in credit market conditions. Moreover, with credit markets remaining weak and bond prices still hovering at low levels due to persisting concerns over defaults, insurers may incur significant realized and unrealized capital losses on their portfolios in the upcoming quarters. Moreover, catastrophe losses continue to keep the balance sheets of a number of carriers under pressure.
However, the ongoing recovery in the credit and equity markets is leading to a reduction in unrealized investment losses. Also, the recent rise in long-term bond yields is expected to somewhat increase the property-casualty insurers’ investment income. Moreover, once the economic recovery gains momentum, insurance volume will grow rapidly. With improved employment in the private sector and recovery in the housing markets, a number of carriers have already started seeing growth in insurance sales.
The recent quarters have been increasingly witnessing a rebound in claims-paying capacity (as measured by policyholders’ surpluses), which reflects the industry’s resilience over the prior years. Conservative investment strategies and capital restructuring efforts will continue to help property-casualty insurers improve their financial footing in the upcoming quarters.
Currently, Alleghany Corporation (Y), EMC Insurance Group Inc. (EMCI) and Everest Re Group Ltd. (RE) -- all with a Zacks Rank #1 -- are worth a look in the property-casualty space.
OPPORTUNITIES
The industry has been undertaking several structural changes that will make underwriting and pricing schemes even more attractive to consumers. Also, improving fundamentals on the back of favorable macroeconomic trends make the stocks of a number of industry participants appear attractive.
We remain positive on Employers Holdings, Inc. (EIG), FBL Financial Group Inc. (FFG), Eastern Insurance Holdings, Inc. (EIHI), Health Insurance Innovations, Inc. (HIIQ), Global Indemnity plc (GBLI) and State Auto Financial Corp. (STFC) with a Zacks Rank #1.
Other insurers that we like with a Zacks Rank #2 include American International Group, Inc. (AIG), Allied World Assurance Company Holdings, AG (AWH), Cincinnati Financial Corp. (CINF), CNA Financial Corp. (CNA) and Fidelity National Financial, Inc. (FNF).
WEAKNESSES
We expect continued pressure on investment yield and lower income from the variable annuity business to restrict the earnings growth rate of life insurers at least in the near term. Also, reduced financial flexibility and weak underwriting will hurt the earnings of many property-casualty insurers. Moreover, the overall industry is vulnerable to the ever-increasing threat of natural disasters.
We would suggest staying away from the Zacks Rank #5 (Strong Sell) stocks such as Meadowbrook Insurance Group Inc. (MIG), American Safety Insurance Holdings Ltd. (ASI) and Donegal Group Inc. (DGICA).
AMER INTL GRP (AIG): Free Stock Analysis Report
AMER SAFETY INS (ASI): Free Stock Analysis Report
ALLIED WORLD AS (AWH): Free Stock Analysis Report
CINCINNATI FINL (CINF): Free Stock Analysis Report
CNA FINL CORP (CNA): Free Stock Analysis Report
DONEGAL GRP -A (DGICA): Free Stock Analysis Report
EMPLOYERS HLDGS (EIG): Free Stock Analysis Report
EASTERN INSURNC (EIHI): Free Stock Analysis Report
FBL FINL GRP-A (FFG): Free Stock Analysis Report
FIDELITY NAT FI (FNF): Free Stock Analysis Report
GLOBAL INDEMNTY (GBLI): Free Stock Analysis Report
HEALTH INS INN (HIIQ): Free Stock Analysis Report
MEADOWBROOK INS (MIG): Free Stock Analysis Report
STATE AUTO FINL (STFC): Free Stock Analysis Report
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