U.S. Insurance Stock Outlook – April 2017

Its well known to investors that insurers are among the major beneficiaries of a rising interest rate environment because of their dependence on bonds to invest the chunks of cash they typically hold to meet their commitments to policyholders. But the gradual improvement in the rate environment after almost a decade surprisingly failed to attract investors attention to insurance stocks.

While the Feds latest rate hike — along with the forecast of two more this year — should have ideally led to a strong rally in insurance stocks, the performance the SPDR Samp;P Insurance ETF (KIE) paints a different picture. This representative ETF of insurance stocks lost 3.3% since the Feds latest rate hike on Mar 15 versus the Samp;P 500s decline of 1.8%. Moreover, the Zacks classified Insurance Industry saw a 4.8% decline over this period.

Perhaps investors are waiting to see what sort of aggressive actions the central bank takes down the road. On the other hand, the market had priced in this modest increase in interest rates even before the Fed took the recent actions. And its quite predictable that there will be only a little impact of this monetary policy tightening on the Treasury yield curve that insurers depend on for their investment income.

Did Low Rates Hurt Insurance Stocks at All?

The low-rate era could not stop the industry from drawing investors attention, as evident from the SPDR Samp;P Insurance ETFs 104.3% gain and the Zacks classified Insurance Industrys surge of 77.4% in the past five years versus 70.2% growth of the Samp;P 500. What made this outperformance possible?

Many insurers have changed their asset allocation strategies in an effort to minimize the impact of low rates on their business. Moving beyond their traditional holdings, they have been investing in racier asset classes for increased returns.

In fact, this has now reduced their ability to reap the benefits of rising rates. Of course, pricing changes and the eventual improvement in yields on high-quality bonds based on rising rates will let them earn more, but their revenue model is now stable enough to counter a low rate environment.

Do Insurance Stocks Still Have Some Upside Left?

While the industry outperformed the broader market over the last five years, there is still a value-oriented path ahead. Looking at the industrys price-to-book ratio, which is the best multiple for valuing insurers because of their unpredictable financial results, investors might still want to pay more.

The Zacks classified Insurance Industry currently has a trailing 12 month P/B ratio of 2.49. This compares unfavorably with the average level of 2.13 seen by the industry in the last five years. In fact, the current number is near the high of 2.57 witnessed by the industry over this period.

However, it actually compares pretty favorably with the market at large, as the current P/B for the Samp;P 500 is at 3.52 and the median level is 3.08.

Overall, while the valuation from a P/B perspective looks stretched when compared with its own range in the time period, its lower-than-market positioning calls for some more upside in the quarters ahead.

But the groups Zacks Industry Rank indicates that any upside is hard to come. Per Zacks classification, the industry is sub-divided into five industries at the expanded (aka X) level: Pamp;C, Multiline, Accident amp; Health, Life and Brokers.

The Zacks Industry Rank is #49 (top 19% of the 250 plus Zacks classified industries) for Life, #61 (top 24%) for Multiline, #167 (bottom 35%) for Pamp;C, #185 (bottom 28%) for Accident amp; Health and #236 (bottom 8%) for Brokers. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The Rate-Hike Benefit Varies Across Industry Segments

Being structurally tied to interest rates, the monetary policy tightening will bring some benefits for the industry sooner or later. But the extent of benefits will vary across industry segments. Moreover, the relationship of profit with the interest rate is not direct.

Property amp; Casualty (Pamp;C) insurance, which is not too sensitive to the interest rate environment, holds a significant amount of bonds, which would fall in value with interest rates rising steadily (which is very unlikely, though). This will lead to capital volatility in the industry.

However, a rising rate environment would keep alleviating the pressure on Pamp;C insurers investment income, and thus their earnings. Moreover, a higher rate environment would make the pricing environment more competitive, further supporting carriers to grow.

Life insurers depend heavily on investment income, so they will benefit more from a rising rate environment. There will be relief from operating pressures resulting from tight credit spreads that the low-rate environment has exerted for so long. However, the benefit is expected to be modest as life insurers have significantly reduced their interest-sensitive product lines in the low-rate era.

No matter how the changing interest rate environment impacts insurers, normal catastrophe losses and continued influx of capital are expected to keep most lines of Pamp;C insurance favorable for buyers. On the other hand, containment of underwriting expenses and a modest increase in premiums are shoring up the prospects of life insurers.

With glaring dissimilarity in business dynamics, it makes better sense to look at the prospects of these two key segments of the US insurance space separately (read our subsequent posts for a detailed insight) .

Factors to Influence the Industrys Performance

Domestic economic progress and a likely boost in infrastructure spending under Trumps administration make the backdrop stronger for the countrys insurers. After all, an improving job market and consumer sentiment, along with a resurgent housing market, will lead to more car and home purchase, which means more insurable exposure.

Moreover, a strengthening US dollar will not have much impact on the industry, as it drives the majority of revenues from the domestic economy.

Evolving insurable risks (such as cyber threats, endemic diseases, etc.) should increase demand for coverage. In fact, this increase in demand from economically recuperating American households should eventually place insurers in a favorable pricing cycle.

Recovery in underwriting and a lower combined ratio for Pamp;C insurers are expected to continue if the trend of modest catastrophe losses prevails.

A strong liquidity profile by virtue of continued capital inflow into the industry, ample capacity, conservative product design and evolving coverage will not only limit any downside but will also keep the industrys growth trend alive.

However, a rising rate environment may result is momentum loss primarily for the housing market, leading to lower insurable exposure in this segment.

Further, increasing dependence on automation will gradually reduce the number of insurable workers across industries.

Bottom Line

Looking at the broader trends, the industry is unlikely to see significant growth until the Fed takes aggressive steps in raising interest rates. Moreover, the emergence of new issues might dampen insurers business. However, learning from past experience, insurers are capable enough of remaining profitable through structural modification and expense savings.

It may not be easy for insurers to please investors. While there are enough drivers for margin expansion, the inability to increase premium rates will keep on curbing profitability.

How to Play Insurance Stocks

As you can see, the interest rate environment may not significantly benefit insurers any time soon and there are other challenges too. However, taking advantage of the recent gloom, one may pick a few insurance stocks that are well positioned to capitalize on the industrys positive trends.

Here are a few top-ranked insurance stocks you may want to consider:

Health Insurance Innovations, Inc. (HIIQ): This Zacks Rank #1 (Strong Buy) stock gained over 170% in the last six months compared with about 8.9% gain for the Samp;P 500. Its Zacks Consensus Estimate for the current year revised 31.8% upward over the last 60 days.

Erie Indemnity Company (ERIE): This Zacks Rank #1 stock gained roughly 21% over the last six months. It has seen the Zacks Consensus Estimate for the current year earnings revising 6.1% upward over the last 60 days.

Legal amp; General Group Plc (LGGNY): The average annual earnings growth rate for this Zacks Rank #1 stock was 15.6% over the last 3-5 years. The price of this stock surged over 25% in the last six months.

Argo Group International Holdings, Ltd. (AGII): This Zacks Rank #1 stock gained nearly 16% over the last six months. Its Zacks Consensus Estimate for the current year revised 5% upward over the last 60 days.

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Legal amp; General Group PLC (LGGNY): Free Stock Analysis Report

SPDR-KBW INSUR (KIE): ETF Research Reports

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Argo Group International Holdings, Ltd. (AGII): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

Investment growth highest among low income earners

The bottom 20% of households has recorded the highest rate of growth in investment income at 8.2% per year, according to the latest analysis from audit, tax and advisory firm KPMG.

In comparison, the yearly rate for households outside this bottom 20% bracket was only 2.2%, the report entitled Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings said.

“This increase reflects a greater exposure to investment activities over the past decade, such as negatively geared property investment, which is confirmed by the substantial increase in value of second mortgage payments being undertaken within this quintile.”

While analysts said it was “understandable” that the poorest in Australian society would wish to diversify and increase their incomes, they admitted that this group is least able to take on financial risk associated with any kind of geared investment activity.

“The top 20% of households is the only cohort to have a greater relative exposure to investment income than the bottom 20%, but it has the highest levels of salaries and wages from which to buffer any downturn in investment returns if that were to occur.”

As interest rates start to climb out of the current low rate environment, KPMG analysts predict that higher mortgage repayments will take up a higher proportion of non-discretionary household costs in the future.

“While financial stress appears relatively stable now, in the event interest rates increase – either due to rises in wholesale funding costs, a tightening in official cash rates, or both -it is likely that household financial stress will increase.”

“It is important to note that the number of very low income households with second mortgages is still low – but has grown by about 20,000 over the past ten years,” Brendan Rynne, chief economist at KPMG told Australian Broker.

“In 2006, only 1% of respondents in the lowest quintile had second mortgage payments – by 2015, it was 2%.”

This was very likely linked to negatively geared property investment which is why this bottom quintile was receiving more investment income, he said.

As for how these low income earners were able to take out loans despite stricter serviceability criteria, incidences of over lax lending during the past ten years were possible, Rynee added.

“It depends on when the loans were taken out. The APRA requirements for interest rate buffers are relatively new (post-2014), so it could be that some lending was done prior to this that might have different prudential management overlays.”

Related stories:

Negative gearing declines while investment surges

Growth in mortgage applications eases

Home loan approvals drop in February

Barings Participation Investors Holds April 2017 Board Meeting

UPDATE — Barings Participation Investors Holds April 2017 Board Meeting

CHARLOTTE, NC, April 24, 2017 (GLOBE NEWSWIRE) — The Board of Trustees of Barings Participation Investors (the Trust) met on April 21, 2017. The Trust also conducted its 2017 Annual Meeting of Shareholders.

The Trusts Trustees determined that the Trusts March 31, 2017 net asset value (NAV) is $141,119,693.36 or $13.56 per share based on 10,404,497 shares outstanding. The Trusts March 31, 2016 NAV was $138,443,220 or $13.39 per share based on 10,342,412 shares outstanding. The Trust reported a NAV of $137,568,919 or $13.35 per share as of December 31, 2016, based on 10,301,085 shares outstanding. All figures other than December 31, 2016 figures are unaudited.

The Trusts net investment income for the quarter ended March 31, 2017 was $2,977,417 or $0.29 per share, of which approximately $405,470 or $0.04 per share represented income due to nonrecurring items, compared to $2,253,036 or $0.22 per share for the quarter ended March 31, 2016. For the previous year ended December 31, 2016, net investment income was $10,671,491 or $1.04 per share.

The Trust declared a quarterly dividend of 27 cents per share payable on May 12, 2017 to shareholders of record on May 4, 2017. The Trust had previously paid a 27 cent-per-share dividend for the preceding quarter. The Board of Trustees also approved the continuance of the Trusts current Investment Advisory and Administrative Services Contract with Barings LLC.

During the quarter ended March 31, 2017 net capital gains of $333,072 or $0.03 per share were realized by the Trust, compared to net capital losses of $369,989 or $0.04 per share for the quarter ended March 31, 2016. For the previous quarter ended December 31, 2016, net capital losses were $1,148,672 or $0.11 per share.

At the Annual Meeting, shareholders elected Michael H. Brown, Barbara M. Ginader and Maleyne M. Syracuse as Trustees for three-year terms.

The market price of Barings Participation Investors as of March 31, 2017 was $14.20, which equates to a 3.98% discount to the March 31, 2017 NAV per share. The Trusts average quarter-end premium for the 3, 5 and 10-year periods was 0.93%, 6.89% and 7.06%, respectively.

Barings Participation Investors is a closed-end management investment company advised by Barings LLC. Its shares are traded on the New York Stock Exchange under the trading symbol (MPV).

Per share amounts are rounded to the nearest cent.

Cautionary Notice: Certain statements contained in this press release may be forward looking statements. Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect managements current estimates, projections, expectations or beliefs, and which are subject to risks and uncertainties that may cause actual results to differ materially. These statements are subject to change at any time based upon economic, market or other conditions and may not be relied upon as investment advice or an indication of the funds trading intent. References to specific securities are not recommendations of such securities, and may not be representative of the funds current or future investments. We undertake no obligation to publicly update forwardlooking statements, whether as a result of new information, future events, or otherwise.

About Barings LLC

Barings is a $280+ billion* global asset management firm dedicated to meeting the evolving investment and capital needs of our clients. We build lasting partnerships that leverage our distinctive expertise across traditional and alternative asset classes to deliver innovative solutions and exceptional service. A member of the MassMutual Financial Group, Barings maintains a strong global presence with over 1,700 employees and 600 investment professionals across 41 offices in 17 countries. Learn more at www.barings.com.

*As of March 31, 2017

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Brian Whelan, Head of Corporate Communications, 980.417.7700, brian.whelan@barings.com

Source: Barings

Why Is Reinsurance Group (RGA) Up 3.7% Since the Last Earnings Report?

A month has gone by since the last earnings report for Reinsurance Group of America, Incorporated (RGA – Free Report) . Shares have added about 3.7% in that time frame, underperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, lets take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Reinsurance Group Q4 Earnings Beat, Decrease Y/Y

Reinsurance Group of America, Incorporated reported fourth-quarter 2016 operating income of $2.63 per share. Though the bottom line outperformed the Zacks Consensus Estimate of $2.50 by 5.2%, it deteriorated 7.4% from the year-ago quarter.

The company’s Traditional business in the US, Asia, the EMEA and Canada was strong in the quarter. The fourth-quarter results displayed the company’s earnings diversification in terms of both geography and product.

Reinsurance Groups operating revenues of $3.1 billion increased 6.5% year over year.

Net premiums of $2.5 billion rose 7.1% year over year on organic growth and moderate contributions from in-force transactions.

Investment income grew 6.5% from the prior-year quarter to $497.2 million. The average investment yield was down by 27 basis points to 4.69%.

Total benefits and expenses of Reinsurance Group increased 5.8% year over year to $2.8 billion. Higher claims and other policy benefits, policy acquisition costs and other insurance expenses, interest expenses, other operating expenses as well as collateral finance and securitization expenses resulted in the overall increase in costs.

2016 Highlights

Operating income of $9.73 per share improved 15.4% year over year.

Reinsurance Groups total revenue of $10.9 billion increased about 8% year over year.

Quarterly Segment Update

Reinsurance Group changed the name of its Non-Traditional segments to Financial Solutions in the fourth quarter.

US and Latin America: Total pre-tax income soared 33.7% to $190.5 million in the quarter.

The Traditional segment reported pre-tax operating income of $129.3 million, up 63.7% year over year. The upside was backed by higher variable investment income and moderately favorable claims experience in the Individual Mortality business. Net premiums grew 4% from the year-ago quarter to $1.4 billion.

The Financial Solutions segment’s pre-tax operating income dipped 1.9% to $46.7 million. Nonetheless, the segment’s operating income was supported by favorable investment spreads. Financial Reinsurance business reported pre-tax operating income of $14.4 million compared with $15.9 million in the prior-year quarter, in line with expectations.

Canada: Total pre-tax operating income decreased approximately 20% to $38.8 million.

The Traditional segment’s pre-tax operating income declined 22.8% to $34.8 million. Net premiums increased 20% to $241.9 million driven by robust growth in individual mortality and a one-time amendment in 2016 on a creditor treaty.

The Financial Solutions segment’s pre-tax income jumped 20.6% year over year to $4.1 million on the back of favorable longevity experience.

Asia Pacific: Total pre-tax operating income plunged 70% to $12.3 million during the quarter.

The Traditional segment reported a pre-tax operating income of $18.5 million, down 48.2% year over year. Premiums were up 15.3% to $448.3 million on strong growth in Asia.

The Financial Solutions segment’s pre-tax operating losses of $6.1 million compared unfavorably with pre-tax operating income of $5.4 million of the year-ago quarter.

Europe, Middle East and Africa (EMEA): This region reported pre-tax operating income of $52.6 million, up 66.1% year over year.

The Traditional segment reported pre-tax operating income of $15.8 million, up 22.5% year over year. Higher premiums and a favorable adjustment associated with improved client reporting primarily supported the upside. However, the improvement was partially offset by moderately unfavorable mortality and morbidity experience in the UK Premiums inched up 0.5% to $301.3 million.

The Financial Solutions segment’s pre-tax operating income soared 95.2% to $36.7 million on the back of sustained favorable experience in both asset-intensive and longevity businesses. New businesses also contributed to the growth.

Corporate and Other: Pre-tax operating loss of $26.3 million was substantially wider than the year-ago loss of $16.7 million.

Financial Update

As of Dec 31, 2016, Reinsurance Group had assets worth $53.1 billion, up 5.4% from year-end 2015.

As of Dec 31, 2016, Reinsurance Group’s book value per share, excluding Accumulated Other Comprehensive Income (AOCI), grew 11.2% year over year to $92.59.

Dividend and Share Repurchase Update

The board of directors announced a quarterly dividend of 41 cents, which is payable on Mar 2, to shareholders on record as of Feb 9, 2017.

The board of directors authorized a new share repurchase program of up to $400 million of the company’s outstanding common stock.

Guidance

For the intermediate term, the life insurer targets growth in operating income per share in the range of 5% to 8% and operating return on equity in the range of 10% to 12%.

Given that the investment environment is unlikely to change much from the current levels, the company anticipates deploying $300-$400 million of excess capital, on an average, annually.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been two upward revisions for the current quarter.

BRIEF-Capitala Finance Corp reports Q4 net investment income of $0.43 per share

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Chris Nolt: Taxation on the Sale of Farm and Ranch Property | TSLN …

Taxes on the sale of farm and ranch property can erode the wealth a family has worked a lifetime for by 25% or more. If you are considering selling land, livestock, crops, machinery or equipment, consult with your tax advisors to learn about the potential tax consequences of the sale and what you can do to preserve your wealth.

Various tax rates and tax treatment apply to the different types of assets involved with the sale of a farm or ranch. It is important that you and seek direction from your tax advisors when purchase price allocation is being negotiated. How you allocate the sales price to the assets of your ranch will determine the tax you ultimately may pay.

Below is a list of asset categories and the type of tax owed on each category:

Inventory and Supplies: Crops, fertilizer, etc.

o Taxed at ordinary income rates.

Livestock

o Raised livestock – breeding stock

o Cattle and horses – held greater than two years – taxed at capital gain rates.

o Other livestock – held greater than one year – taxed at capital gain rates.

o There is no cost basis in raised livestock.

o Purchased livestock – Breeding stock

o Cattle and horses – held greater than 2 years – taxed at capital gain rates.

o Other livestock – held greater than 1 year – taxed at capital gain rates.

o Cost basis is purchase price. Depreciation recapture rules apply.

o Purchased or raised livestock that is held for sale

o Taxed at ordinary income rates.

Equipment

o Irrigation systems, swathers, bailers, tractors, etc. IRC Section 1245 assets. Recapture of depreciation applies.

Ranch House

o IRC Section 121 Principal Residence Exclusion allows an individual to exclude up to $250,000 of taxable gain from the sale of a principal residence and a married couple filing a joint return to exclude up to $500,000 of gain. Homes owned in a corporation are not eligible for the Principal Residence Exclusion.

Buildings

o Single-Use Property – IRC Section 1245 depreciation recapture applies.

o IRC Section 1250 Property – potential depreciation recapture may apply.

Land

o Gain taxed at capital gain rates.

Below is a summary of the four ways investors may be taxed on the sale of a farm or ranch:

1. Federal Ordinary Income Tax: Taxpayers will be taxed at rates up to 39.6% depending on taxable income.

2. Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.

3. Federal Capital Gain Taxes: Investors owe Federal capital gain taxes on their economic gain depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.

4. New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on net investment income. This 3.8% Medicare surtax applies to taxpayers with net investment income who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, net investment income includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of unearned income).

5. State Taxes: Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed.

Upcoming issues of The Fence Post will feature articles on how to save taxes on the sale of farm and ranch property.

Chris Nolt is the author of the book; Financial Strategies for Selling a Farm or Ranch and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. To order a copy of Chriss book, call 800-517-1031 or visit: http://www.solidrockproperty.com and http://www.solidrockwealth.com.

BRIEF-GSV Capital Corp – Qtrly net investment income $0.17per share

Reuters is the news and media division of Thomson Reuters. Thomson Reuters is the worlds largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Learn more about Thomson Reuters products: