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P&C Insurance Outlook: Favorable Operating Backdrop Raises Hope

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After a tumultuous 2017, property and casualty (P&C) insurance industry seems well poised on prudent underwriting, better pricing, surplus capital and growing demand for insurance. Last year was the costliest for P&C insurers in terms of catastrophe loss.
    
Nonetheless, a milder hurricane forecast brings relief to the insurance sphere that suffered heavy losses due to higher claim costs stemming from above-average catastrophe activity last year. Colorado State University (CSU) released its updated outlook for the 2018 Atlantic hurricane season earlier this month. The report predicts a below-normal season with a total of 12 named storms, lower from 14 predicted in June.

Due to massive cat loss, property and casualty insurers braved price hikes that remained flat for quite some time. The industry witnessed 19 back-to-back quarters of soft pricing market. Better pricing should help insurers meet claims without rupturing profitability.  

Personal auto insurers have raised premium rates to deal with increasing accident frequency and severity trends. Nonetheless, increasing ‘distracted driving’ continues to weigh on auto insurers’ profitability. However, adoption of accident avoidance technologies could lead to better underwriting results for auto insurers.

Premiums also will get a boost from the emerging economies like China, which is considered to be the third-largest insurance market in the world by industry experts as per market sources.

Emergence of new insurable risks including cyber threat should keep business for insurers afloat.

Also, given a not-so-active cat environment post 2011, the P&C insures have effectively built on their reserves. The industry currently boasts a capital surplus at an all-time high. While this is another reason interrupting insurers from hiking prices, the sturdy capital somewhat helped insurers weather the turbulent 2017.

On the back of accelerated pace of rate hikes, P&C insurers should witness a drive in their investment income. The Federal Reserve’s rate raise in June already marks the second increase this year with hints of two more in the offing. The Central Bank has also implied about another three being lined up in 2019 and a couple of in 2020.

Industry Lags in Terms of Shareholder Returns

Looking at shareholder returns over the past year, it appears that the broader economic recovery wasn’t enough for enhancing investors’ confidence in the industry’s growth prospects. Unprecedented occurrences of catastrophes and an all-time high capital level restricting insurers braving price hike, remain a challenge.

The Zacks Property and Casualty Insurance Industry, a 48-stock group within the broader Zacks Finance Sector, has underperformed the S&P 500 index but outperformed its own sector over the past year.

The stocks in this industry have collectively gained 12.9% against the Zacks S&P 500 Composite and the Zacks Finance Sector’s rally of 18.8% and 8%, respectively.

One-Year Price Performance


 

Property and Casualty Insurance Stocks Trading Cheap

Thanks to the underperformance of the industry over the past year, the valuation looks really cheap now. One might get a good perspective of the industry’s relative valuation, looking at its price-to-book ratio (P/BV), the most appropriate multiple for valuing Property and Casualty insurers because of large variations in their earnings results from one quarter to the next.

This ratio essentially measures a Property and Casualty insurer’s current market value relative to what it would be worth if it chooses to shut down.

The industry currently has a trailing 12-month P/BV ratio of 1.42, somewhat higher than the lowest level over the preceding year. When compared with the highest level of 1.59 and 1.44 at the median level during that period, there is apparently room for upside left.

The space also looks inexpensive when compared with the market at large as the trailing 12-month P/BV ratio for the S&P 500 is 3.97 and the median level stands at 3.79.

Price-to-Book Ratio (TTM)



As finance stocks typically have a lower P/BV ratio, comparing Property and Casualty insurers with the S&P 500 index might not make sense to many investors. But a comparison of the group’s P/BV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance Sector’s trailing 12-month P/BV ratio of 2.57 and the median level of 2.58 for the same period are way above the Zacks Property and Casualty Insurance Industry’s respective ratios.

Price-to-Book Ratio (TTM)



Bullish Earnings Outlook Raise Optimism


Unforeseen occurrences of catastrophe events have been spurring demand for property and casualty insurance products. Rising disposable income on the back of consistent economic growth has been providing support to take insurance covers.

But what really matters to investors is whether this group has potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a solid value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near term.

One reliable measure that can help investors understand the industry’s potential for a robust price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences its stock performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry as well as the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings projections for 2019 while the light blue line represents the same for 2018.
 
Price and Consensus: Zacks Property and Casualty Insurance Industry



This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $6.42 EPS estimate for the industry pertaining to 2018 is not the actual bottom-up dollar EPS estimate for every company within the Zacks Property and Casualty Insurance industry but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the industry’s earnings of $6.42 per share for 2018 but how this dollar number has evolved recently.   

Current Fiscal Year EPS Estimate Revisions


As you can see here, the $6.42 EPS estimate for 2018 is improving since April-end (though declined a little in July) and also increased from $5.83 this time last year. In other words, the sell-side analysts covering the companies within the Zacks Property and Casualty Insurance industry space have been steadily raising their estimates.
 
Zacks Industry Rank Indicates Improvement Prospects


The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all-member stocks.

The Zacks Property and Casualty Insurance industry currently carries a Zacks Industry Rank #125, placing it at the top 49% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Property and Casualty Insurance: Earnings & Revenue Trends

The P&C industry was severely affected in 2011, attributable to a series of weather-related cat events across the globe. However, it seems that the industry has braced itself to weather such unforeseen cat events and thus despite the devastating hurricane that struck during the third quarter of 2017, the industry stood strong banking on clever underwriting, reinsurance covers and sturdy reserves. This is reflected through bottom-line performances, which have been progressing since 2012.



The top-line performance of the Zacks Property and Casualty Insurance industry depicts revenue growth since 2012.


 

Bottom Line

Apart from following stringent underwriting practice, the P&C insurers are taking reinsurance covers in order to safeguard their profitability.  Adoption of technologies like robotic process automation (RPA), cognitive intelligence (CI) or blockchain technologies should help insurers lower operational costs, thus aiding margins.

Competitive pricing and a compelling product portfolio should continue to drive business for insurers.

Lower tax incidence owing to the implementation of Tax Cuts and Jobs Act is lending an additional impetus to insurers’ profitability.  

Estimated lower cat loss along with excess capital should place insurers well to pursue mergers and acquisitions, invest in technologies and return capital to shareholders.

Also, keeping in mind the solid fundamentals of the industry and a favorable operating backdrop, investors could take advantage of the cheap valuation and bet on a few property and casualty insurance stocks with a solid earnings view.

Below are four stocks with positive earnings estimate revisions and sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Navigators Group, Inc. (NAVG - Free Report) : Headquartered at Stamford, CT, this property and casualty insurer’s Zacks Consensus Estimate for current-year EPS has been revised 15.1% upward over the past 30 days. The stock has gained 16.4% over the past year.

Price and Consensus: NAVG



NMI Holdings Inc. (NMIH - Free Report) : Based in Santa Clara, CA, this property and casualty insurer has surged 86.6% over the past year. The Zacks Consensus Estimate for current-year EPS has been raised 4.4% over the past 30 days.

Price and Consensus: NMIH


 

The Progressive Corporation (PGR - Free Report) : The EPS estimate for this Mayfield Village, OH-domiciled property and casualty insurer has moved 6.1% north for the current year over the past 30 days. The stock has rallied 34.3% over the past year.

Price and Consensus: PGR



Alleghany Corporation (Y - Free Report) : New York, NY-based property and casualty insurer has witnessed its estimates move 3.5% north in the past 30 days. The stock has gained 9.2% over the past year.

Price and Consensus: Y



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