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Zacks Industry Outlook Highlights: Cincinnati Financial, Markel, White Mountains Insurance Group, American Financial Group and National General Holdings

For Immediate Release

Chicago, IL – May 09, 2016 – Today, Zacks Equity Research discusses the Insurance, (Part 3), including Cincinnati Financial Corp. (CINF), Markel Corp. (MKL), White Mountains Insurance Group, Ltd. (WTM), American Financial Group Inc. (AFG) and National General Holdings Corp. (NGHC).

Industry: Insurance, Part 3

Link:http://www.zacks.com/commentary/80302/will-rising-rates-be-b...

Property & Casualty (P&C) insurers are less sensitive to interest rate than life insurers, but the sensitivity has both positive and negative directions. Whether the upside offsets the downside has yet to be seen, as there hasn’t been any palpable progress on the rate hike front so far.

A rising rate environment would boost investment earnings of P&C insurers that has been declining in a prolonged low-rate environment. Moreover, a higher rate environment should make the pricing environment competitive, and act as an earnings booster.

However, the key downside is a significant amount of bonds in P&C insurers’ portfolio losing value if rates are hiked steadily. P&C insurers’ extreme sensitivity to asset inflation will aggravate the situation. And this could ultimately result in capital volatility.

In other words, the value of the properties insured by carriers will appreciate with an improving real estate market, increasing their potential liabilities from claims. This may outpace the rising yields on bonds they added to their portfolios for covering the claims. In fact, the bonds in their portfolios will lose value with rising interest rates.

Addressing this concern would require P&C insurers taking more risk to meet the rising liabilities from claims. And this would eventually increase their costs.

A Look into the Fundamentals

With the continuation of a soft market environment -- characterized by low premium rates -- the commercial, property and personal lines of the P&C industry should see stressed bottom lines.

The competition for market share has been intensifying among primary insurers, as capital-rich reinsurers are increasingly entering into primary business lines. This is negatively impacting rates. In fact, the overall pricing for commercial property has been maintaining a declining trend for a considerable period and the same is likely to continue for some time. The absence of catastrophe in recent years will add to the downward pressure.

However, ample underwriting capacity, a strong liquidity profile and evolving coverage opportunity should let P&C insurers stand tall.

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 improved earnings and policyholders' surpluses. The industry has also been witnessing continued inflow of alternative capital (which is one of the reasons for market softening). High capital levels on the other hand are positioning the industry to perform well.

Further, better preparation to withstand catastrophe losses should translate into higher underwriting profits and a lower combined ratio in the upcoming quarters. Conservative investment strategies should also work in favor.

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 the credit market showing resilience and almost no possibility of a sudden spike in interest rates, insurers are likely to incur lesser realized and unrealized capital losses in the quarters ahead.

Moreover, insurance volume is expected to expand going forward with 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 recent 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, for more enthusiasm in renewals and to meet evolving demands of policyholders, insurers are in the process of product reframing and innovation. This should help them expand their customer base for products that will offer higher margins.

The emerging risks related to cyber threats are also giving P&C insurers scope to capitalize on. This segment, though relatively small in size, has been witnessing continued growth in premium and policy count. On the other hand, the chance of cyber threats damaging the insurance industry is a major concern.

Stocks to Consider

Despite the near-term concerns related to market softening, there are plenty of reasons to be optimistic about U.S. P&C insurers. The industry has been undertaking several structural changes that will make underwriting and pricing schemes even more attractive to consumers. Though the negatives of the impending rising rate environment are concerns, there will be positives to offset the same.

One may consider buying some P&C insurance stocks that promise better performance based on their favorable Zacks Rank.

We particularly recommend Cincinnati Financial Corp. (CINF), Markel Corp. (MKL) and White Mountains Insurance Group, Ltd. ( WTM) with a Zacks Rank #1 (Strong Buy).

Stocks in our U.S. P&C insurance universe with a Zacks Rank #2 (Buy) currently include American Financial Group Inc. (AFG) and National General Holdings Corp. ( NGHC).

Check out our latest U.S. Insurance Industry Outlook for more on the current state of affairs in the overall insurance market.

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CINCINNATI FINL (CINF): Free Stock Analysis Report
 
MARKEL CORP (MKL): Free Stock Analysis Report
 
WHITE MTN INS (WTM): Free Stock Analysis Report
 
AMER FINL GROUP (AFG): Free Stock Analysis Report
 
NATIONAL GNL HL (NGHC): Free Stock Analysis Report
 
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