CHICAGO, May 9, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Insurance, including W.R. Berkley Corporation (NYSE: WRB-Free Report), Horace Mann Educators Corp. (NYSE: HMN-Free Report), Prudential plc (NYSE: PUK-Free Report) and Symetra Financial Corporation (NYSE: SYA-Free Report).
The U.S. insurance industry is running out of steam, with companies that have reported Q1 earnings so far showing a year-over-year slowdown. The insurers that are yet to report are unlikely to change the picture as the industry apprehends an 11.8% earnings decline. Moreover, the pace of premium rate increase, though not dramatic, has stalled thanks to the continued low interest rate environment.
Fundamental challenges such as weak underwriting gains and low investment yields also stand out. While loss of earnings momentum can be short lived, a respite from the underlying weakness is not expected before long. Earnings growth would also be stalled by heightened market competition.
The ongoing reserve development brings some relief. Also, increasing demand from economically recuperating American households should keep the endeavor to reach a favorable pricing cycle alive.
A lot depends on catastrophe losses too. The forecast of a below-average 2014 Atlantic hurricane season is expected to keep catastrophe losses modest similar to last year. This should lead to further recovery in underwriting and a lower combined ratio this year.
Looking at broader trends, the overall health of the industry improved to a great extent in the recent past riding on improved macroeconomic trends, after enduring pricing pressures and reduced insured exposure since the latest recession. Moreover, learning from past experiences, insurers are now resorting to expense saving measures.
If insurers manage to overcome the short-term resistance that may be holding back premium rate increase, they should ultimately witness margin expansion and mitigate the adversities of the still low interest rate environment to their investment income. Also, insurers now have ample capital to take on new challenges and increasing awareness on the risk of catastrophe.
That said, though the market condition isn't soft anymore, reasonable hardening is not expected at least in the near term. Moreover, stress on balance sheet, lack of real employment growth and legislative challenges are threatening insurers' ability to rebound to the historical growth rate.
Also, limited organic growth opportunities and more capital for regulatory requirement will push the industry toward consolidation. Insurers are seeking structural economies of scale through mergers and acquisitions for a bigger share of the market. While this will help insurers stay afloat, inter-segment competition will alleviate. So increasing profitability after complying with regulatory requirements would be quite a tall order.
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 W.R. Berkley Corporation (NYSE: WRB-Free Report), Horace Mann Educators Corp. (NYSE: HMN-Free Report), Prudential plc (NYSE: PUK-Free Report) and Symetra Financial Corporation (NYSE: SYA-Free Report) with a Zacks Rank #1.
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