The Zacks Analyst Blog Highlights: Travelers, Allied World Assurance and Everest Re Group

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Oct 17, 2014, 09:30 ET

CHICAGO, Oct. 17, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Travelers Cos. Inc. (NYSE:TRV-Free Report), Allied World Assurance Company Holdings AG (NYSE:AWH-Free Report) and Everest Re Group Ltd. (NYSE:RE-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Thursday's Analyst Blog:

3 P&C Insurers Assuring Upbeat Q3 Earnings

The U.S. property-casualty (P&C) or the non-life insurance industry appears to move toward a state of maturity – characterized by consolidation amongst incumbents, moderate growth outlook but overall stronger balance sheets and reserves – at the dusk of 2014.

The growth outlook is increasingly being dictated by the economics of organic growth from customer retention through superior and tailored services, particularly in the home and auto businesses, as well as of inorganic growth from acquisitions. The right balance of these factors would help in not only promote cross-selling among insurers and reinsurers but also counter competitive pressure by expansion in emerging markets.

The P&C industry's business models are also driven by capital and competition, which augurs for disciplined expense management and diversification of risks, primarily given the volatility in catastrophes and claims payments. A healthy capital position and prudent risk management have been supporting consolidation of the P&C insurers. Capital adequacy also stems from the recent regulatory mandates that require maintenance of sufficient capital and low debt-levels to avert business risks.

On the other hand, policies-in-force of most sector participants are being boosted by strong direct distribution networks. Yet, despite moderate catastrophe losses in the first nine months of 2014, the P&C industry has exhibited subdued growth, given the consistent low interest rate environment as well as nominal growth in prices, premiums and underwriting profits, thereby making way for a stabilized combined ratio and margins.

Moreover, the P&C industry is set to face more quarters of low investment yields as the interest rate hikes are expected to remain undecided at least through the first half of 2015. Additionally, the fall is typically a slack season for business renewals, which further signals the absence of any significant rate hikes. Market experts also believe that sluggishness in underwriting incomes, higher loss costs and investment challenges may likely increase the combined ratio.

While we foresee a plateaued growth outlook for the U.S. P&C industry in the upcoming quarters, we cannot overlook its overall strong balance sheet, reserves and statutory surplus. Investments in insurance and reinsurance methodologies to minimize risk exposure and operating costs are also showing positive results. These factors should continue to boost operating leverage and generate stable earnings going forward.

Meanwhile, the 'P&C insurance' holds a Zacks Industry Rank #25, witnessing an improvement of 9 positions from the last change. This further reflects a favorable position of the non-life insurance industry among the 260+ Zacks industry groups.

How to Pick the Right Stock?

Picking the most worthy stocks within the vast P&C insurance industry could be a Herculean task. One comprehensible way is the prudent selection of the stocks that are a perfect amalgam of a favorable Zacks Rank – a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Zacks Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

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 method to their portfolio, there are 3 P&C insurance stocks that emerge as potential growth riders next week:

The Travelers Cos. Inc. (NYSE:TRV-Free Report) is a Zacks Rank #2 (Buy) insurer with an earnings ESP of +10.33%. The Zacks Consensus Estimate for third-quarter 2014 is $2.13 per share.

With an average earnings beat of +4.6% in 3 of the last 4 quarters, the company is expected to surpass expectations in the third quarter as well. Positive renewals and pricing as well as high retention rate and strong capital position scores well with ratings agencies and investors. Meanwhile, Travelers' expense reduction initiatives should result in annualized savings of about $140 million in 2015.

Headquartered in New York, Travelers is a Fortune 100 company and a premier P&C insurer in the U.S. and select international markets of Canada, U.K. and Ireland.

Travelers is scheduled to announce its third-quarter results before the closing bell on Oct 21.

Allied World Assurance Company Holdings AG (NYSE:AWH-Free Report), a Zacks Rank #3 (Hold) insurer with a striking earnings ESP of +48.08% appears to be a good pick as well. The Zacks Consensus Estimate for the third quarter stands at 52 cents per share. A strong capital position and stable financial leverage, despite a spree of acquisitions and alliances, are supporting the company's global expansion plans, while earnings accretions from these further validate a compelling growth story.

Headquartered in Baar, Switzerland, Allied World Assurance is a premier global P&C and specialty insurer and reinsurer that is tapping the markets of the U.S., Canada, Bermuda, U.K., Singapore, Hong Kong and Labuan. It is also well-placed in the Forbes list of 2000 companies.

Everest Re Group Ltd. (NYSE:RE-Free Report) is another Zacks Rank #3 insurer worth reckoning with an earnings ESP of +8.48%. The Zacks Consensus Estimate for third-quarter 2014 is pegged at $4.60 per share.

This company's strength lies in its significant market share and strong balance sheet. Expansion and rate hikes are also aiding consistent improvement in overseas businesses. Everest Re's 10-year average combined ratio has remained below break-even levels, which signify its underwriting profitability.

Headquartered in Hamilton, Bermuda, Everest Re virtually underwrites all classes and categories of business in treaty, facultative and specialty lines both through brokers and directly with ceding companies, globally.

Both Allied World Assurance and Everest Re are likely to release their third-quarter results after the closing bell on Oct 22.

What Lies Ahead?

While uncertainty from weather-related events prevails, we believe the investment yields should shore up once the Fed hikes interest rates, most likely in 2015. Improved momentum in the economy should also drive returns in this industry. Alongside, healthy renewals, steady underwriting, cost discipline, and improved premiums are likely to boost organic growth for the U.S. P&C insurance industry in future. For the moment, one can confidently bank on the industry outperformers that still boast of superior earnings strength.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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