Best stocks to invest in – Insurers in Q3 Suffer Less Damages: 6 Stocks Set to Beat



Best stocks to invest in


The third-quarter earnings releases are being churned out at full throttle, with 198 members of the elite S&P 500 Index having reported already as per our latest Earnings Preview article. Let’s see how the quarter is turning up for the life and non-life or property and casualty (P&C) insurance space.
 
Peek Into Q3: Drivers & Dampeners
 

The P&C insurance industry’s profitability declined in the first half of 2016 from the prior-year period due to higher incurred loss from a number of catastrophes that ravaged the industry.
The situation was much better in the third quarter when hurricane Mathew was the only significant catastrophe causing loss of life and property. We therefore expect to see a decline in incurred loss in the third quarter which will help the bottom line.
 
Also, the players in the industry stand strong with respect to their capital position. According to a report issued by ISO and Property Casualty Insurers (PCI) Association of America.es, despite paying out $14.5 billion in natural disaster caused claims in the first half of 2016, cumulative policyholders’ surplus for the U.S. P/C insurance industry was $680.6 billion, a record high, as of Jun 30, 2016. The capital strength was intact in the third quarter, given that there was no meaningful claims payment on account of catastrophes.
 
Players have thus been utilizing the excess capital to buy back shares. Significant share buyback will in turn drive up the bottom line.
 
Another recent activity witnessed in the industry was a rise in the frequency and severity of auto claims. According to Insurance Information Institute, over the past two years, U.S. auto insurance companies saw private-passenger loss costs rise sharply as insurers received more and costlier claims. There has been an alarming increase in crashes and claims reported. This, combined with the cost of the claims themselves, has led to a dramatic rise in the overall loss cost. Though the affected players will seek an increase in auto insurance rates as a remedial action to restore profitability in this line of business, it will take time for the loss to reverse to profitability.
 
Another factor affecting the industry’s profitability is the interest rate environment which is still low. The Federal Reserve refrained from raising the rate till it gains further confidence in economic strength. The rate was last hiked in the Dec 2015 meeting to only 0.25–0.50%. Since then, the rates have been left untouched.
 
Therefore, investment income, which forms a major component of insurers’ revenues, remains under pressure. But a broader invested asset base and alternative asset classes bring some respite.

Nevertheless, even this little increase was a silver lining for life insurers who suffered spread compression on products like fixed annuities and universal life due to sustained low rate. To cope with this low rate era, life insurers have lowered their interest-sensitive product lines.

 

However, a low rate is not all bad news for insurers. These players generally hold a considerable amount in bonds, which would see a decline in value if rates rise. 

All in all, the industry presents a strong investment opportunity. Let’s take a look at the following stocks that are poised to deliver positive earnings surprises in their upcoming reports. 

 
Way to Pick the Right Insurance Stocks

 

Picking the right stock for your portfolio from too many participants could be difficult. But an easy way to narrow down the list is to look at stocks with a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

 

Earnings ESP is our proprietary methodology for determining stocks with the best chance of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

 

The combination of a favorable Zacks Rank and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

 

For investors seeking to apply this strategy to their portfolio, we have highlighted four insurance stocks that might stand out with an earnings beat in their releases. 

 
Lincoln National Corp. (LNC) through its subsidiaries, engages in multiple insurance and retirement businesses in the United States. With a Zacks Rank #2 and an Earnings ESP of +0.62%, Lincoln National looks well poised for a positive surprise. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The Zacks Consensus Estimate for the second quarter is pegged at $1.62 per share, which translates into a year-over-year growth rate of 45.72%.

 
The Allstate Corp. (ALL), together with its subsidiaries, engages in property-liability insurance and life insurance business in the United States and Canada. Allstate has a Zacks Rank #3 and an Earnings ESP of +1.61%. The Zacks Consensus Estimate for the third quarter is pegged at $1.24 per share.

 

Bloomfield, CT based Cigna Corp.(CI) along with its subsidiaries provides health care and related benefits, the majority of which are offered through workplace. With a Zacks Rank #3 and an Earnings ESP of +2.62%, Cigna looks well poised for a positive surprise. The Zacks Consensus Estimate for the third quarter is pegged at $1.91 per share.

 
Loews Corporation (L) through its subsidiaries, provides commercial property and casualty insurance in the United States, Canada, the United Kingdom, Continental Europe, and Singapore. Loews has a Zacks Rank #3 and an Earnings ESP of +4.35%. The Zacks Consensus Estimate for the third quarter is pegged at 69 cents per share.

 
American Financial Group, Inc. (AFG) through its subsidiaries, provides property and casualty insurance products in the United States. The company carries a Zacks Rank #3 and an Earnings ESP of +2.61%. The Zacks Consensus Estimate for the third quarter is pegged at $1.53 per share.

 
CNA Financial Corporation (CNA) provides commercial property and casualty insurance products primarily in the United States. It operates through Specialty, Commercial, International, Life & Group Non-Core, and Corporate & Other Non-Core segments.  It a Zacks Rank #2 and an Earnings ESP of +2.38%. The Zacks Consensus Estimate for the third quarter is pegged at 84 cents per share.

 
RenaissanceRe Holdings Ltd. (RNR) together with its subsidiaries, provides reinsurance and insurance coverages and related services in the United States and internationally. A Zacks Rank #3 and an Earnings ESP of +3.59% poise Reinsurance Re well for a positive earnings surprise. The Zacks Consensus Estimate for the third quarter is pegged at $2.23 per share.

 

 Where Do Zacks’ Investment Ideas Come From?

You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 “Strong Buy” stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 “Strong Sells” and other private research. See the stocks free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
CIGNA CORP (CI): Free Stock Analysis Report
 
LOEWS CORP (L): Free Stock Analysis Report
 
AMER FINL GROUP (AFG): Free Stock Analysis Report
 
CNA FINL CORP (CNA): Free Stock Analysis Report
 
RENAISSANCERE (RNR): Free Stock Analysis Report
 
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