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6 Value Picks From the Undervalued P&C Insurance Industry

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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 results, is 1.34, less than the Zacks S&P 500 composite’s P/B of 4.66 and the sector’s P/B of 2.58. Such below market positioning hints at room for upside in the coming quarters.

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

More on the Industry

Underwriting results, a P&C insurer’s profitability measure, are favorably impacted by a benign catastrophe environment. However, during the first half of 2020, preliminary economic loss totaled $75 billion while preliminary insured loss was $30 billion, stemming from 207 catastrophe events across the globe, per reports from Aon. The economic loss and preliminary insured loss were 23% lower but 8% higher than the respective 10-year average, the report stated.

Also, the hurricane season that typically starts in June and lasts through November during a year, gathers strength in August and September. Colorado State University (CSU) estimates ‘extremely active Atlantic hurricane season in 2020’. There will be 24 named storms, including 12 hurricanes and six major hurricanes per CSU. In September, Hurricane Laura made landfall, near Cameron, LA on the Gulf Coast. Per a report by AccuWeather, Hurricane Laura might cause about $25-$30 billion in economic losses while an analyst from Wells Fargo Securities projects insured loss between $8 and $15 billion.

Every industry is grappling with the challenges posed by the COVID-19 pandemic. Insurers have considered losses incurred due to the pandemic as catastrophe loss. Per the Asian Development Bank, global economic losses from the pandemic could be between $5.8 trillion and $8.8 trillion in 2020 in a report publish by Business Standard in June 2020.

Frequent occurrences of natural disasters should accelerate the policy renewal rate. Moreover, sturdy policyholders’ surplus will help the industry absorb losses.

Though catastrophes are a concern for insurers, due to the high degree of losses incurred, they implement price hikes to ensure uninterrupted claims payment. Per a report published in Insurance Journal, global average commercial insurance prices increased 19% in the second quarter of 2020, marking the eleventh straight quarter of increase. Per Global Insurance Market Index the rise was largely driven by increases in property insurance rates and financial and professional line and was the highest since 2012. In the first quarter of 2020, commercial insurance pricing improved 14% per Marsh LLC in a report published in Business insurance.

Property and casualty insurers are also increasingly taking reinsurance covers to shield their profit. These have been inducing increase in reinsurance renewal rates.

As per Verisk and the American Property Casualty Insurance Association, net written premiums rose 6.2% to $164.4 billion in the first quarter of 2020 while net underwriting gain improved 19.9% year over year to $6.3 billion.

Also, per a report by Carrier Management, Fitch Ratings analysts project an overall combined ratio of 97 in 2020, a slight improvement from 98 in 2019.

P&C insurers’ financials are less sensitive to interest rates than life insurers’ as the large financial portfolios managed by these carriers are designed to be fairly conservative.  The Federal Reserve decided to keep interest rate unchanged within its target range of 0.20-0.25%, in the wake of the COVID-19 outbreak, which continues to weigh on economic activity, employment and inflation in the near term. In fact, the Fed might not raise rate until 2023.

Nonetheless, increasing adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain and cloud computing should help insurers control costs. Also, the insurance industry is well capitalized, enabling players to pursue mergers and acquisitions, thus curbing competition in the process.

Price Performance

The industry has underperformed the Zacks S&P 500 composite but outperformed the Finance sector year to date. While the Zacks S&P 500 composite gained 6.9%, the industry has declined 5.2%. The sector declined 13.8% in the said time frame.



Nonetheless, better pricing, prudent underwriting, strategic initiatives to build a competitive and diversified portfolio, mergers and consolidation for ramping up growth and extending global presence and sturdy capital position poise insurers well for a healthy performance ahead. The industry’s earnings estimate for the current year has gone up 3.1% since July end.

Picking the Stocks

With the help of our Zacks Stock Screener, we have selected six P&C insurance stocks with an impressive Value Score of A or B 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.

Allstate (ALL - Free Report) provides property and casualty, and other insurance products in the United States and Canada. The stock currently has a P/B ratio of 1.17. The Zacks Consensus Estimate for current-year earnings has moved up 716.3% over the past 30 days. It carries Value Score of A and sports a Zacks Rank #1.

Alleghany Corporation (Y - Free Report) provides various property and casualty insurance products and services in the United States. The stock currently has a P/B ratio of 1.23. The Zacks Consensus Estimate for current-year earnings has moved up 31.9% over the past 30 days. It has a Value Score of B and carries a Zacks Rank #2.

First American Financial (FAF - Free Report) provides financial services. The stock currently has a P/B ratio of 1.29. The Zacks Consensus Estimate for current-year earnings has moved up 25.1% over the past 60 days. It has a Value Score of A and carries a Zacks Rank #2.

Donegal Group (DGICA - Free Report) provides personal and commercial lines of property and casualty insurance to businesses and individuals in the Mid-Atlantic, Midwestern, New England, and southern states. The stock currently has a P/B ratio of 0.89. The Zacks Consensus Estimate for current-year earnings has moved up 28% over the past 60 days. It has a Value Score of A and sports a Zacks Rank #1.

Stewart Information Services (STC - Free Report) provides title insurance and real estate transaction services. The stock currently has a P/B ratio of 1.32. The Zacks Consensus Estimate for current-year earnings has moved up 54.2% over the past 60 days. It has a Value Score of B and sports a Zacks Rank #1.

The Hanover Insurance Group (THG - Free Report) provides various property and casualty insurance products and services in the United States. The stock currently has a P/B ratio of 1.23. The Zacks Consensus Estimate for current-year earnings has moved up 1.9% over the past 60 days. It has a Value Score of A and carries a Zacks Rank #2.

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