The insurance industry has performed well so far this year, riding on better pricing, prudent underwriting standards, increased exposure, streamlined operations, a wider global presence and a solid capital position. Increased technology advancements and an improving rate environment have added to the upside. The insurance market has gained 12.8% over the past year.
Banking on strong fundamentals and benefiting from a favorable macro backdrop, Assurant, Inc. AIZ, MGIC Investment Corporation MTG, NMI Holdings Inc. NMIH and Radian Group Inc. RDN have not only outperformed the industry but have also crushed the Zacks S&P 500 composite, the insurance market and the Finance sector. These companies are well-poised to sustain the bull run next year.
How Was 2023 for the Insurers?
The economy has improved throughout 2023. Real gross domestic product (GDP) increased at an annual rate of 5.2% in the third quarter of 2023 and 2.1% in the second quarter of 2023, per the Bureau of Economic Analysis. At the December FOMC meeting, the Fed estimated the real GDP to grow 2.6% for 2023 and the unemployment rate to be 3.8%. The Personal Consumption Expenditures inflation projection has also been lowered by 50 bps to 3.2% in the December 2023 projection from 3.7% in the September projection.
Exposure growth, better pricing, prudent underwriting and favorable reserve development will help non-life insurers withstand the blow despite an above-average hurricane season. Also, frequent occurrences of natural disasters should accelerate the policy renewal rate.
Swiss Re estimated economic losses from natural catastrophes and man-made events in 2023 to be $269 billion, suggesting a rise from the previous 10-year average of $235 billion. Per Swiss Re, insured losses are estimated to exceed $100 billion in 2023 on natural catastrophes. Per Gallagher Re, total economic losses were estimated to be $290 billion for the first nine months of 2023, resulting from elevated natural catastrophe losses globally.
The net combined ratio for 2023 for the property and casualty industry is forecast to be 103.8%, stemming from severe convective storm losses, per a Triple-I and Milliman report.
The U.S. property and casualty industry recorded a $24.5-billion net underwriting loss in the first half of 2023, per a new AM Best report. The combined ratio is projected to be 104.5 per the credit rating giant in the first half of 2023. AM Best continues to maintain a negative market segment outlook on the U.S. personal lines insurance segment.
Global commercial insurance prices rose for 24 straight quarters, though the magnitude has slowed down over the past 11 quarters, per Marsh Global Insurance Market Index.
Better pricing ensures improved premiums and prudent claims payment. Analysts at Swiss Re Institute predict premium growth of 7.5% for 2023. Per reports published in Carrier Management, direct premiums written across the P&C business in 2023 are estimated to grow in the double digits. Per a report by Triple-I and Milliman, net written premium growth for 2023 is estimated at 8.3% for the industry.
The insurance industry is rate-sensitive. The interest rate environment has started to improve. The Fed has already made four hikes in 2023, taking the figure to 11 since March 2022. The Fed has held interest rates unchanged at 5.25-5.5% at the December FOMC meeting. An improving rate environment is a boon for insurers, especially long-tail insurers.
Increased awareness following the pandemic continues to support the life insurance market. Total individual life insurance new annualized premium increased 4% to $3.7 billion year over year, per preliminary results from LIMRA’s U.S. Retail Individual Life Insurance Sales surveys and estimates. The survey also found that policy count improved 4% year over year for the first nine months of 2023. LIMRA expects overall life insurance sales in 2023 to exceed marginally the record-high premium in 2022. Life insurance premium growth fell 3% in the first half of 2023. Sales trends have improved thus far in the second half of 2023.
Nevertheless, a solid capital level supports insurers in pursuing strategic mergers and acquisitions to gain market share, expand in niche areas, and diversify operations into new business lines and geography, as well as increase dividends, pay special dividends and buy back shares.
The industry is undergoing accelerated digitalization. Players are investing heavily in technology to expedite business operations. Increased use of technology like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing, robotic process automation, Chatbot and RoboAdvisory, and insurtech solutions continue to save costs.
Can These Stocks Retain the Bull Run in 2024?
Per December Economic Projections, The Fed lowered its inflation forecast from 2.6% to 2.4% for 2024. The Fed projects U.S. GDP growth of 1.5% in 2024. Real GDP growth is projected to be positive in 2024. As the insurance industry is an important contributor to the country’s GDP, it is well-poised for growth, given the economic expansion.
At the December FOMC meeting, the Fed signaled three interest rate cuts in 2024, with further rate cuts expected in 2025. Insurers, being the beneficiaries of the rising rate environment, are positioned to generate better investment results.
The improved pricing environment should continue through 2024. Better pricing, improved underwriting standards and streamlined operations should continue to fuel premiums. Per Fitch Ratings, personal auto is likely to deliver a better performance in 2024. This, coupled with better investment results and lower claims, should fuel insurers' performance next year, per Fitch Ratings. Per Deloitte Insights, gross premiums are estimated to increase sixfold to $722 billion by 2030. China and North America should account for more than two-thirds of the global market, per the report. Per Willis Towers Watson’s 2024 Insurance Marketplace Realities report, commercial property insurance should witness rate increases in 2024. Per the report, the increases will likely be in the single digits for all lines. Per LIMRA, the total U.S. retail life insurance premium is projected to increase 5% in 2024 as economic conditions are likely to stabilize.
Insurers should continue to invest heavily in technology to improve scale and efficiencies, while M&A should be on the rise as more insurers seek growth through expansion.
Picks for Better Return
With the help of the Zacks Stock Screener, we have selected four insurance stocks that have rallied this year and are poised to retain the momentum next year. These top-ranked stocks have rallied more than 25% in a year. These stocks have delivered earnings surprises in each of the last four reported quarters and witnessed northbound estimate revisions.
Atlanta, Georgia-based Assurant is a global provider of risk management solutions in the housing and lifestyle markets. The Global Lifestyle segment is expected to benefit from mobile protection program growth in North America, higher Connected Living earnings and strong prior-period sales in Global Automotive. Higher net investment income, after client profit sharing, favorable loss experience in select domestic ancillary products and expansion across distribution channels are expected to aid Global Automotive.
Assurant has a solid capital management policy. In November 2023, the board of directors approved a dividend hike of 3%, seeing an eight-year CAGR (2016-2023) of 4.3%, which is the 19th consecutive year of an increase. Beside the regular dividend hike, Assurant remains committed to returning excess cash to shareholders through share repurchases. The company's return on equity of 17.3% bettered the industry average of 13.2%.
The Zacks Consensus Estimate for AIZ’s 2024 earnings suggests 3.7% growth from the year-ago reported figure on 4% higher revenues. Expected long-term earnings growth is pegged at 14.6%, higher than the industry average of 12.4%. The company delivered an earnings surprise of 42.38%, on average, in the trailing four quarters. The consensus estimate has moved up 0.06% in the past 30 days. The company has an impressive VGM Score of A.
Assurant currently flaunts a Zacks Rank #1 (Strong Buy) and has a Value Score of A. Shares of AIZ have rallied 35.7% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Based in Milwaukee, WI, MGIC Investment is the parent company of Mortgage Guaranty Insurance Corporation, the largest private mortgage insurer in the United States. Higher insurance in force, a decline in loss and claims payments, lower delinquency, better housing market fundamentals, and prudent capital deployment bode well for growth of this insurer.
MGIC Investment expects new businesses, combined with increasing annual persistency, to result in continued growth of the insurance-in-force portfolio. The multi-line insurer remains well-poised for growth, riding on a higher level of new and existing home sales, an increased percentage of homes purchased for cash, and an improved level of refinance activity. MGIC Investment, with a Zacks Rank #3 (Hold) at present, expects to retain higher levels of liquidity at the holding company.
By virtue of capital contribution and reinsurance transactions, the company has significantly improved its capital position. Its solid capital base is expected to increase the long-term value to shareholders while maintaining financial strength and flexibility.
MTG delivered an earnings surprise of 12.57%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2024 has moved 0.4% north in the past 30 days. The expected long-term earnings growth rate is pegged at 5%. MGIC Investment’s return on equity of 15.2% bettered the industry average of 13.2%.
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Headquartered in Emeryville, CA, NMI Holdings provides private mortgage insurance (MI). The mortgage insurer should continue to benefit from a strong mortgage origination market, robust growth in high-quality and short portfolios, and increased private mortgage insurance penetration rates. It currently carries a Zacks Rank #2 (Buy) and an impressive VGM Score of A.
NMIH continues to build on its position in the private MI market, expand its customer base and grow its insured portfolio of high-quality residential loans by focusing on long-term customer relationships, financial strength and profitability.
NMI Holdings has a comprehensive reinsurance program in place for nearly the entirety of its in-force portfolio. This, in turn, enhances its return profile, absorbs loss, provides efficient growth capital and mitigates the impacts of credit volatility.
The Zacks Consensus Estimate for NMIH’s 2024 earnings suggests 6.4% year-over-year growth on 7.1% higher revenues. The Zacks Consensus Estimate for 2024 has moved 0.2% north in the past seven days. The expected long-term earnings growth rate is pegged at 10.6%. NMIH’s return on equity of 18.1% bettered the industry average of 7.1%. Over the past year, the company’s shares have gained 42.8%.
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Philadelphia, PA-based Radian is a credit enhancement company that supports homebuyers, mortgage lenders, loan servicers and investors with a suite of private mortgage insurance, and related risk-management products and services. Improvements in quality and the size of mortgage insurance in force poise it well for growth. The multi-line insurer currently has a Zacks Rank #3.
Radian’s mortgage insurance portfolio will create a strong foundation for future earnings. RDN is focused on improving its mortgage insurance portfolio, the primary catalyst of long-term earnings growth.
Radian maintains a solid balance sheet, with sufficient liquidity and strong cash flows. A strong capital position helps the company deploy capital via share repurchases and dividend hikes that enhance shareholders’ value. Riding on continued financial strength and flexibility, Radian declared a 22.5% increase in its quarterly dividend in the first quarter of 2023. This is the fourth consecutive year wherein RDN has increased the quarterly dividend, with a total increase of 80% over the past three years. Its current dividend yield of 3.2% betters the industry average of 2.6%.
RDN’s earnings surpassed estimates in each of the last four quarters, the average surprise being 25.26%. Its expected long-term earnings growth rate is pegged at 5%. Shares of RDN have rallied 50.2% over the past year. The company’s return on equity of 15.6% bettered the industry average of 13.2%.
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