As the name suggests, the Multi line Insurance Industry consists of participants providing a single insurance coverage bundling automobile, homeowner, long-term care, life and health insurance needs of individuals or businesses. An insured is covered through a single contract and has to pay a single premium for all the coverages. Meanwhile, multiline insurers stand to gain from disseminating the risk of exposure among several factors.
Strengthening of U.S. economy as reflected through an improving rate environment, inflation reaching the set 2% target, a favorable employment backdrop, higher disposable income and lower tax rates should keep the momentum alive for multiline insurers.
With changing U.S. demography as baby boomers are touching retirement age, demand for retirement benefits products increases. Also, to protect properties from unforeseen damages, demand for insurance covers is visibly growing. This should continue to fuel premium revenues for multiline insurers. Premium revenues contribute lion’s share to the top line.
This year has already witnessed two rate raises in the first half. Per current market speculations, there is a very high possibility of nearly 96% for a rate hike in September 2018 followed by a 60% chance of another hike in December 2018. Fed had hinted at about three increases in 2019 and a couple of more during 2020. Insurers invest a portion of premiums they receive and thus, a higher rate will boost investment income, which is a major component of the top line.
A milder hurricane forecast brings relief to insurers that incurred claim costs because of unprecedented hurricanes that wreaked havoc last year. Colorado State University (CSU) in its outlook for the 2018 Atlantic hurricane season last month predicted a below-normal season with a total of 12 named storms. Better pricing should help insurers meet claims without denting profitability.
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. Unexpected occurrences of catastrophes, regulatory requirement and an all-time high capital level restricting desired pricing, remain a challenge.
The Zacks Multi line Insurance Industry, a 25-stock group within the broader Zacks Finance Sector, has underperformed the Zacks S&P 500 Composite and its own sector over the past year.
The stocks in this industry have inched up 0.01 % against the Zacks S&P 500 Composite and the Zacks Finance Sector’s rally of 17.6% and 7.6%, respectively.
One-Year Price Performance
Multi line 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 Multi line insurers because of large variations in their earnings results from one quarter to the next.
This ratio essentially measures a Multi line 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 1.47, somewhat higher than the lowest level and the median over the preceding year. When compared with the highest level of 1.67, there is apparently a 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 4.08 and the median, 3.82.
Price-to-Book Ratio (TTM)
As finance stocks typically have a lower P/BV ratio, comparing Multi line 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 as well as the median level of 2.58 for the same period is way above the Zacks Multi line Insurance Industry’s respective ratios.
Price-to-Book Ratio (TTM)
Underperformance Likely to Persist on Bearish Earnings View
Growing demand for retirement benefit products alongside unpredicted catastrophe events have been spurring demand for insurance products and this economic stability is benefiting multiline insurers.
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 anticipation for its member companies. Empirical research shows that a company’s earnings guidance significantly influences its stock performance.
The Price & Consensus chart of the industry shows the market's evolving bottom-up earnings expectations for the industry as well as its 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 Multi line 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 $3.82 EPS estimate for the industry pertaining to 2018 is not the actual bottom-up dollar EPS estimate for every company within the Zacks Multi line 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 $3.82 per share for 2018 but how this dollar number has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $3.82 EPS estimate for 2018 is down since January-end but was up from $3.70 during this time last year. In other words, the sell-side analysts covering the companies within the Zacks Multiline Insurance Industry space have been lowering estimates since the beginning of the current year.
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 #66, thus placing it at the top 26% 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.
Multi Line Insurance: Earnings & Revenue Trends
Increase in premiums attributable to growing demand for insurance covers and a better pricing plus improvement in net investment income have been driving revenues for multiline insurers. This is indicated by the impressive top-line performances, which have been progressing since the beginning of the ongoing year.
Top-line growth coupled with prudent expense management and lower tax incidences are boosting the bottom line in turn.
Another important signal of a solid long-term prospect is the rise in the group’s return on equity (ROE), a key metric for evaluating insurance stocks.
Adoption of technologies, competitive pricing, restructuring and redesigning of portfolio to augment operational excellence should well place multiline insures for growth.
Lower tax incidence owing to the implementation of Tax Cuts and Jobs Act is lending an additional support to insurers’ profitability.
The insurance industry currently boasts a capital surplus at an all-time high. This should further provide cushion to industry players for pursuing strategic mergers and acquisitions to expand business, add capabilities and curb competition. A sturdy capital position should also help multiline insurers engage in shareholder-friendly moves like hiking dividend, authorizing share buybacks or paying special dividends.
Also, keeping in mind the solid fundamentals of the industry and a positive operating environment, investors could take advantage of the cheap valuation and bet on a few multiline insurance stocks with a solid earnings view.
Below are four solid stocks with upward earnings estimate revisions and a bullish Zacks Rank. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Radian Group Inc. (RDN - Free Report) : Philadelphia, PA-based provider of mortgage and real estate products and services in the United States has witnessed its estimates move 3.8% north over the past 30 days. The stock has gained 9.2% over the past year and sports a Zacks Rank #1.
Price and Consensus: RDN
Assurant, Inc. (AIZ - Free Report) : Headquartered at New York, NY, this provider of risk management solutions for housing and lifestyle markets in North America, Latin America, Europe and the Asia Pacific has seen the Zacks Consensus Estimate for current-year EPS being revised 3% upward over the past 30 days. The stock has rallied 24.1% over the past year and carries a Zacks Rank #2 (Buy).
Price and Consensus: AIZ
Cigna Corporation (CI - Free Report) : Based in Bloomfield, CT, this provider of insurance and related products and services in the United States and internationally has gained 12.8% over the past year. The stock has witnessed the Zacks Consensus Estimate for current-year EPS being raised 0.5% over the past 30 days and it carries a Zacks Rank of 2.
Price and Consensus: CI
Kemper Corporation (KMPR - Free Report) : The EPS estimate for this Chicago, IL-domiciled provider of property and casualty plus life and health insurance to individuals and businesses in the United States has moved 1.9% north for the current-year bottom line over the past 30 days. The stock has gained 1.6% over the past year and is a Zacks #2 Ranked player.
Price and Consensus: KMPR
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