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W.R. Berkley or Cincinnati Financial: Which is Better Placed?

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Losses incurred by The Zacks Insurance - Property and Casualty  companies have been increasing in recent years, which means that insurers have paid out more money in claims than they used to. This trend has affected auto insurance and homeowners’ insurance providers. This is because catastrophe losses have increased, keeping the combined ratio under pressure, and so have administrative cost and other expenses resulting in net margin contraction.

Insurance industry losses from natural catastrophes and man-made disasters globally amounted to $83 billion in 2020, the fifth-costliest on record since 1970, per the Swiss Re Institute's preliminary sigma estimates. Losses were driven by the pandemic as well as a number of hurricanes, floods and hail and wildfires. The insurance industry covered 45% of global economic losses in 2020, above the 10-year average of 37%, per the Swiss Re Institute's preliminary sigma estimates.

Better pricing, prudent underwriting and favorable reserve development will enable the insurance industry to absorb catastrophe losses going ahead. Per Willis Towers Watson’s 2021 Insurance Marketplace Realities report, except for one, all lines should witness price rise this year.

The industry players have been gaining momentum on the back of higher new business premiums, growth in line of business and increase in agency renewal written premiums, improving return on equity and non-cat property losses, and growing international business. The P&C insurers are well poised to grow, given better pricing, technological investment and upgrade, new products and business expansion, expanded distribution, operational strength, higher retention, strong renewal pure price increases, net appointment of retail agents and healthy balance sheets.

However, the players have been grappling with low interest rates, which have put pressure on investment results. With indication of no raises until 2023, higher invested asset based should provide cushion.

Nonetheless, the insurance industry is now focused on adopting technological changes, which include Artificial Intelligence (AI) and Robotic process automation (RPA), Chatbot and RoboAdvisory. It has paved the way for faster and more accurate decision making as well as seamless operations while maintaining social distancing norms. The industry has also witnessed the emergence of insurtech — technology-led insurers.  The new trends include the use of APIs and micro services, smartphone applications and machine learning, Internet of Things (IoT) adoption, and Blockchain.

The industry has gained 9.9% year to date compared with the S&P 500 composite’s rise of 4.3%. Against this backdrop, let’s look at two leading P&C insurer companies, namely Cincinnati Financial Corporation (CINF - Free Report) and W.R. Berkley Corporation (WRB - Free Report) , which have a respective market capitalization of $16.3 billion and $12.7 billion. Both stocks currently have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let's analyze certain other parameters to find out which company is on a healthier ground.

Earnings Surprise History

A stock’s earnings surprise track helps investors get an idea about its performance in the previous quarters.

Cincinnati Financial came up with a four-quarter average earnings surprise of 4.10% whereas W.R. Berkley recorded an average negative earnings surprise of 13.49%.

Hence, Cincinnati Financial has an edge in this regard over W.R. Berkley.

Price Performance

In the year-to-date period, Cincinnati Financial and W.R. Berkley have gained 15.7% and 7.6%, respectively. The industry has rallied 10.8% in the same time frame compared while the S&P 500 composite has risen 3.5%.

Return on Equity

Return on equity is a profitability measure, which accounts for profits generated on shareholders’ equity. Hence, higher ROE reflects the company’s efficiency in using its shareholders’ funds and is preferred by all equity investors.

W.R. Berkley’s ROE of 7.4% compares favorably with Cincinnati Financial’s ROE of 5.6%.

Valuation

Price-to-book value is one of the multiples used for valuing insurance brokers. Compared with the industry’s trailing-12-month P/B ratio of 1.39, Cincinnati Financial and W.R. Berkley have a reading of 1.51 and 2.01, respectively.

It is thus clear that Cincinnati Financial’s valuation is better than W.R. Berkley’s.

Growth Projection

Earnings growth along with stock price gains is often indicative of a company’s strong prospects.

The Zacks Consensus Estimate for Cincinnati Financial’s 2021 earnings implies a 23.4% rise from the year-ago reported figure while that of W.R. Berkley suggests an increase of 56.9% from the prior-year reported number.

Debt-to-Capital

Cincinnati Financial’s leverage ratio of 7.7 betters W.R. Berkley’s ratio of 30.1. Therefore, Cincinnati Financial is at an advantage over W.R. Berkley on this front.

Combined Ratio

Cincinnati Financial’s combined ratio was 98.1% in 2020, whereas that of W.R. Berkley was 94.9% in the said time frame. Thus, the combined ratio of W.R. Berkley betters than that of Cincinnati Financial.

Dividend yield

Cincinnati Financial’s dividend yield of 2.4% betters W.R. Berkley’s dividend yield of 0.7%. Thus, Cincinnati Financial stands at an advantageous position over W.R. Berkley on this front.

Bottom Line

Our comparative analysis shows that Cincinnati Financial is better-positioned than W.R. Berkley with respect to price performance, earnings surprise, valuation, dividend yield and leverage. Meanwhile, W.R. Berkley scores higher in terms of return on equity, combined ratio and growth projection. As the scale is slightly tilted toward Cincinnati Financial, the stock discernibly makes a more promising investment proposition.

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