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3 Value Stocks to Bet on From Undervalued P&C Insurance Space

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The Zacks Property and Casualty Insurance industry is currently undervalued compared with the Zacks S&P 500 composite as well as the Zacks Finance sector. The price-to-book (P/B) ratio, the best multiple for valuing insurers because of their unpredictable financial results, is 1.35, less than the Zacks S&P 500 composite’s P/B of 5.5 and the sector’s P/B of 3.2. Such below market positioning hints at room for upside in the coming quarters.

Zacks Investment Research
Image Source: Zacks Investment Research

Zacks Investment Research
Image Source: Zacks Investment Research

Before their valuation expands, it is wise to add some undervalued stocks with growth potential to one’s portfolio.

Driving Factors

The property and casualty insurance industry has been gaining momentum on the back of improved pricing, increased technology advancements, exposure growth, underwriting profitability, favorable reserve development and global expansion as well as impressive solvency level.

Per the Global Insurance Market Index by Marsh, global commercial insurance prices increased 9% in the second quarter of 2022. This marked the 19th consecutive quarter in which composite pricing rose, continuing the longest run of increases since the inception of the index in 2012. Per Marsh, global property insurance pricing and casualty pricing increased 6% each on average in the second quarter of 2022. Pricing in financial and professional lines had the highest rate of increase across the major insurance product categories at 16%. Per Willis Towers Watson’s 2022 Insurance Marketplace Realities report, rates will continue to rise but by a small margin. Better pricing will help insurers write higher premiums and address claims payment prudently. Per Deloitte insights, global non-life premiums are estimated to grow 3.7% in 2022.

Price hikes, operational strength, higher retention, strong renewal and the appointment of retail agents should help write higher premiums.

The P&C insurers remain exposed to catastrophe loss from natural disasters and weather-related events, which induce volatility in their underwriting results. Per Colorado State University (CSU), the 2022 above-average hurricane season may have 19 named storms, including nine hurricanes and four major hurricanes. This year’s hurricane season could be about 130% of the average season per CSU. Global estimated insured losses from natural catastrophes in the first half of 2022 were $35 billion, 22% above average of the past 10 years ($29 billion), per a report by Swiss Re Institute.

Exposure growth, better pricing, prudent underwriting and favorable reserve development will help withstand the blow. Also, frequent occurrences of natural disasters should accelerate the policy renewal rate.

Consolidation in the property and casualty industry is likely to continue as players look to diversify their operations into new business lines and geography. Buying businesses along the same lines will also continue as players look to gain market share and grow in their niche areas. With the reopening of the economy, optimistic growth outlook and sturdy capital level, the industry is witnessing a number of mergers, acquisitions and consolidations.

The interest rate environment has started to improve. The Fed officials raised interest rates by 75 basis points. Currently, the interest rate stands at a range of 2.25%-2.5%. The Fed signaled to raise interest rates to 4% next year. Insurers, being beneficiaries of an improving rate environment, are poised to gain. A larger investment asset base and alternative investments in private equity, hedge funds, and real estate, among others, coupled with an improving rate environment, are expected to aid net investment income, an important component of insurers’ top line.

The insurers have increased investment in emerging technologies in a bid to drive efficiency, enhance cybersecurity, upgrade policy administration and claims systems as well as expand automation capabilities across the organization. The adoption of technologies such as robotic process automation, Chatbot and RoboAdvisory, artificial intelligence and data analytics, insurtech solutions, telematics and cloud computing is gaining steam. Deloitte’s Global survey projects insurers’ technology budget to increase 13.7% in 2022.

Northbound Estimates

Since September 2021, the Zacks Consensus Estimate for the industry’s current year earnings has gone up by 3.1%. The expected long-term earnings growth rate is currently pegged at 11.7%.

Price Performance

The industry has shed less value than the Zacks S&P 500 composite as well as the Finance sector, year to date. While the industry has lost 5.8%, the Zacks S&P 500 composite and the sector have decreased 18.3% and 16.3%, respectively, in the said time frame.

Zacks Investment Research
Image Source: Zacks Investment Research

Value Picks

With the help of the Zacks Stock Screener, we have selected three P&C insurance stocks with an impressive Value Score of A and a Zacks Rank #2 (Buy). Back-tested results have shown that stocks with a favorable Value Score coupled with a solid Zacks Rank are the best investment options. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These stocks have also witnessed positive estimate revisions, reflecting analysts’ confidence in the companies’ operational efficiency.

Arch Capital Group, Ltd. (ACGL - Free Report) is a leading specialty P&C and mortgage insurer and offers insurance, reinsurance and mortgage insurance worldwide. New business opportunities, rate increases, growth in existing accounts and improvement in Australian single premium mortgage insurance are likely to drive premiums. The expected long-term earnings growth rate is pegged at 10%.

Shares of ACGL have gained 2.3% year to date. The stock currently has a P/B ratio of 1.45. The Zacks Consensus Estimate for current-year earnings has moved north by 1.3% over the past 30 days and indicates a year-over-year increase of 29.6%.

Chubb Limited (CB - Free Report) , the world’s largest publicly traded property and casualty (P&C) insurer, continues to witness robust premium revenue growth globally. It expects the momentum to continue, driven by its commercial businesses, double-digit commercial P&C rate increases and expanding underwriting margins, new business and strong renewal retention. The expected long-term earnings growth rate is pegged at 10%.

Chubb has always considered acquisitions as an effective strategy for inorganic growth and global expansion. Through acquisitions, CB has expanded its international and domestic footprint and built a superior portfolio of products and services.

Chubb has hiked its dividend for the last 28 straight years. CB’s dividend witnessed an eight-year CAGR (2015-2022) of 4.8%.

Shares of CB have returned 1.3% year to date. It currently has a P/B ratio of 1.54. The Zacks Consensus Estimate for current-year earnings has moved up by 0.7% over the past 30 days and indicates a year-over-year increase of 25.4%.

W.R. Berkley Corporation (WRB - Free Report) is one of the largest commercial lines property and casualty insurance providers. W.R. Berkley is well poised to grow given higher premiums at other liability, professional liability, short-tail lines, commercial auto and workers' compensation, rate increase, international business expansion, high retention and increased exposure. The expected long-term earnings growth rate is pegged at 9%.

WRB has a solid balance sheet with sufficient liquidity and robust cash flows that support growth initiatives and effective capital deployment. The insurer has increased its dividend for the last 17 years and paid special dividends in the last 13 years.

WRB shares have gained 17.9% year to date. It currently has a P/B ratio of 2.63. The Zacks Consensus Estimate for current-year earnings has moved up 0.9% over the past 30 days and indicates a year-over-year increase of 20.6%.


In-Depth Zacks Research for the Tickers Above


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