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P&C Insurance Outlook: Excess Capital, Rate Hike to Drive Growth

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The Zacks Property and Casualty Insurance (P&C) industry comprises companies that provide commercial and personal property and casualty insurance products and services. Such insurance coverage helps to safeguard property in case of any natural or man-made disaster. Liability coverages are also part of this industry.

Insurance coverages provided by the companies include commercial and personal properties, automobiles, professional risk, marine, excess casualty, aviation, personal accident, commercial multi-peril, professional indemnity and surety, among others.

Premiums are the primary source of revenues for these insurers. These companies invest a portion of premiums collected to meet their commitments to policyholders. Thus, a rising rate environment is a boon for P&C insurers.

Here are the industry’s three major themes:

•    The industry is witnessing an increase in premium pricing after suffering from low prices for several years. In the first quarter of 2019, in personal lines insurance homeowners, automobile and personal articles saw rate increase of 2%, 2.5% and 1%, respectively. In Commercial lines, most of the lines saw premium rate increase of 2%, while Commercial Auto saw a 7% rate increase. A rise in premium rates should lead to top-line growth. However, still-low interest rates (which might not see any increase  in 2019, due to Fed’s dovish monetary policy) might put pressure on insurers’ net investment income, another important component of total revenues.
 
•    The property and casualty industry boasts good policy holders’ surplus, which is insurers’ excess of assets over liabilities. At year-end 2018, the ratio of new premiums written to surplus was 0.83 to 1.0 (lower numbers are stronger). In the first quarter of 2019, policyholders’ surplus remained strong with the stock market’s robust performance. This indicates that the industry remains well capitalized and financially prepared to pay for large-scale losses in 2019 and beyond. This surplus capital should also fuel increased consolidation in the industry as players seek to increase market share, achieve geographical diversification, change product mix and growth in niche areas.

•    The industry is witnessing increased use of technology, like blockchain, AI, advanced analytics, telematics, cloud-computing and robotic process automation to expedite business operations and save unnecessary delay and cost.  The industry is also experiencing the emergence of Insurtech — technology-led insurers — creating competition for the incumbent players. It is to be noted that the focus for insurtech is mainly on the property and casualty insurance industry. Given that these insurtechs are already widely using the latest technologies and concepts that the incumbents are just beginning to experiment with, there remains huge market risk.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Property and Casualty Insurance industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #192, which places it in the top 36% 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. In a year’s time, the industry’s earnings estimates for the current year have gone up 6.4%.
 
Before we present a few property and casualty stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry In Line With S&P 500 and Beats Sector

The Property and Casualty Insurance industry has remained in line with the Zacks S&P 500 composite and outperformed its own sector over the past year. The stocks in this industry have collectively increased 4.4% in the past year while the Finance sector has dipped 2.7%. Meanwhile, the Zacks S&P 500 composite has increased 4.8%.

One-Year Price Performance

Current Valuation

On the basis of the trailing 12-month price-to-book (P/B) ratio, which is commonly used for valuing insurance stocks, the industry is currently trading at 1.38X compared with the S&P 500’s 3.98X and the sector’s 2.38X.

Over the past five years, the industry has traded as high as 1.66X, as low as 1.25X and at the median of 1.48X.

Price-to-Book (P/B) Ratio (TTM)

Price-to-Book (P/B) Ratio (TTM)

Bottom Line

Prudent underwriting practices, competitive pricing and a compelling product portfolio should continue to drive the bottom line for P&C insurers. Moreover, a sturdy capital level should place insurers well to pursue mergers and acquisitions, invest in technologies and return capital to shareholders.

Nonetheless, exposure to unforeseen catastrophe events and unpredictable magnitude of losses remain concerns for P&C insurers.

Stocks to Consider

Investors may consider buying the following stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hallmark Financial Services, Inc. (HALL - Free Report) is involved in marketing, underwriting and premium financing of non-standard automobile insurance, as well as claims adjusting and other insurance-related services. The Zacks Consensus Estimate for 2019 EPS has moved nearly 4.5% north over the past 30 days. The stock currently carries a Zacks Rank #1.

CNA Financial Corp. (CNA - Free Report) is engaged in property and casualty industry and sale of life insurance products. The Zacks Consensus Estimate for 2019 EPS has moved nearly 3% north over the past 30 days. The stock currently carries a Zacks Rank #2.

American Financial Group, Inc. (AFG - Free Report) , based in Cincinnati, OH, is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and in the sale of traditional fixed and fixed-indexed annuities. The Zacks Consensus Estimate for 2019 EPS has moved nearly 0.3% north over the past 30 days. The stock currently carries a Zacks Rank #2.

National General Holdings Corp. (NGHC - Free Report) is a New York-based specialty personal lines insurance holding company with a Zacks Rank of 2. The consensus mark for 2019 EPS has increased 1.1% over the past seven days.

Cincinnati Financial Corp. (CINF - Free Report) is a Fairfield, OH-based property casualty insurance provider with a Zacks Rank #2. The Zacks Consensus Estimate for 2019 EPS has increased 0.6% over the past 30 days.

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