Zacks Industry Outlook Highlights: Employers Holdings, Fidelity & Guaranty Life Common, AmTrust Financial Services, Endurance Specialty Holdings and Federated National Holding

CHICAGO, Sept. 8, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Insurance, including Employers Holdings, Inc. (NYSE:EIG-Free Report), Fidelity & Guaranty Life Common (NYSE:FGL-Free Report), AmTrust Financial Services, Inc. (Nasdaq:AFSI-Free Report), Endurance Specialty Holdings Ltd. (NYSE:ENH-Free Report) and Federated National Holding Company (Nasdaq:FNHC-Free Report).

Industry: Insurance

Link: http://www.zacks.com/commentary/34270/

All companies in the Insurance industry, which is the medium level (or M-level) component of the broader Finance sector, have reported Q2 results. The earnings beat ratio (percentage of companies coming out with positive surprises) is 68.2%, while the revenue beat ratio stands at 63.6%.

The broader Finance sector showed a recovery from Q1 in terms of growth. The sector witnessed year-over-year earnings growth of 0.9% compared with a decline of 7.3% in the prior quarter. Revenues also witnessed 2.5% growth compared with a decline of 1% in the prior quarter. For the full year, the sector is expected to witness earnings growth of 2.2% and revenue decline of 6.3%.

However, the sector's Q2 beat ratios for earnings and revenues were impressive at 77.5% and 72.5%, respectively. For a detailed look at the earnings trend for this sector and others, please read our latest Earnings Trends report.

Life Insurers Still Struggle: Modest Growth Ahead

Life insurers managed to increase net income in the last few quarters by trimming underwriting expenses and with the help of a modest increase in premiums. While variable annuity portfolios and other fee-driven businesses will act in favor with equity markets improving, downward pressure on investment yields due to higher hedging costs will continue to mar profitability.

Moreover, life insurers have been struggling with low interest rates for years, as these primarily invest in long-term interest earnings assets which were not able to generate sufficient returns to match their future commitments related to the policies sold to various individuals.

Until interest rates increase, which is not expected before 2Q14, life insurers will have to continue to seek alternative asset classes to optimize return from investments. But the addition of any risky asset class in their investment portfolios with the hope of better yield may result in further losses.

However, with the advent of a higher-rate environment, life insurers will be relieved from the lingering downward pressure on spreads and operating fundamentals. This will lead to higher returns and profit margins.

The industry's statutory capital level improved significantly in the last few quarters, with the help of steady retained earnings and effective capital management. A beefed-up capital market should keep the industry's liquidity profile strong in the upcoming quarters and help industry participants confront challenges.

Moreover, continued economic recovery and higher disposable income will help life insurers broaden their customer base. Also, the carriers are transforming their products and businesses to make them attractive and profitable for customers.

P&C Insurers Look Steady, Growth Momentum Intact

P&C Insurers have been witnessing improvement across most segments in recent quarters. However, market hardening, which is the key to improvement, appears to have slowed again. After struggling with falling prices for years, the industry witnessed better premium rates in 2013. But the low interest rate environment is again restricting the improvement. The low-rate environment is also putting pressure on the investment portfolios of P&C insurers.

On the other hand, concerns related to weak capital levels are now things of the past, as the industry's capital position has been building up on the back of better-than-before earnings. High capital levels and lower-than-normal catastrophe losses are further reining in price hardening.

While a pause in pricing power improvement and continued pressure on investment income are concerns, capital strength and better preparation to withstand catastrophe-related losses should translate into returns in the upcoming quarters.

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. With credit and equity markets showing improvement, insurers are likely to incur lesser realized and unrealized capital losses on their portfolios in the quarters ahead.   

Moreover, insurance volume is expected to expand going forward on speedier economic recovery. With improved employment in the private sector and recovery, though uneven, in the housing markets, a number of carriers have seen growth in insurance sales in the recent quarters.

Further, the recent quarters have seen a rebound in claims-paying capacity (as measured by policyholders' surpluses), which reflects the industry's resilience. Conservative investment strategies and capital restructuring efforts will continue to help property-casualty insurers improve their financial footing in the upcoming quarters.

Though competition is cropping up both within the primary lines of the P&C space and with reinsurers' expansion, proactive transformational measures, including adoption of technology solutions, will give a competitive advantage.

Also, it appears that the pace of renewal rate growth is slowing with intensifying competition and is expected to remain flat through the remainder of 2014. In order to regain the renewal enthusiasm and meet evolving demands of policyholders, insurers are in the process of product reframing and innovation.

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. (NYSE:EIG-Free Report), Fidelity & Guaranty Life Common (NYSE:FGL-Free Report), AmTrust Financial Services, Inc. (Nasdaq:AFSI-Free Report), Endurance Specialty Holdings Ltd. (NYSE:ENH-Free Report) and Federated National Holding Company (Nasdaq:FNHC-Free Report) with a Zacks Rank #1 (Strong Buy).

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