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3 Value Stocks 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 and the Zacks Finance sector. The price-to-book (P/B) ratio, the best multiple for valuing insurers because of their unpredictable financial results, stands at 1.43, below the Zacks S&P 500 composite’s P/B of 6.75 and the sector’s P/B of 3.2. Such a market positioning hints at room for upside in the coming quarters.

Price to Book Ratio (TTM)

Zacks Investment Research
Image Source: Zacks Investment Research

Price to Book Ratio (TTM)

Zacks Investment Research
Image Source: Zacks Investment Research

Before valuation expands, it is wise to add some undervalued stocks like Everest Re Group Limited (RE - Free Report) , Arch Capital Group Limited (ACGL - Free Report) and United Fire Group Inc. (UFCS - Free Report) with growth potential to one’s portfolio.

Driving Forces

The industry is well-poised to benefit from better pricing, prudent underwriting and increased exposure despite rise in catastrophe losses.

According to a Verisk and the American Property Casualty Insurance Association report, the net income of private property/casualty insurers improved 19.6% in the first nine months of 2021, driven by premium growth and investment gains. The annualized rate of return on average policyholders' surplus — a key measure of overall profitability — improved 50 basis points to 6%, per the report.

However, the industry incurred an underwriting loss of $5.6 billion during the first nine months of 2021 with combined ratio deteriorating 70 basis points to 99.5 due to higher non-cat loss, especially in personal auto, per the report.

Nonetheless, occurrences of frequent natural disasters are likely to accelerate the policy renewal rate and position insurers for price hikes. Per Willis Towers Watson’s 2022 Insurance Marketplace Realities report, rates will continue to rise but by a small margin. Insurers are increasingly taking reinsurance covers to safeguard their profit.

Though P&C insurers’ financials are less sensitive to interest rates than life insurers, a better interest rate environment will cushion investment income.  Per CME FedWatch Tool, rates can rise twice this year, expanding by 25 basis points each time.

Accelerated digitalization has become the need of the hour and the insurers continue to invest heavily in technology to improve basis points, scale and efficiencies. Per Deloitte Insights, the technology budget is projected to increase 13.7% in 2022.

Deloitte’s Global outlook survey noted more active M&A strategies in 2022, as more insurers seek growth through expansion.

Zacks Rank

The Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid prospects in the near term. The industry currently carries a Zacks Industry Rank #85, which places it in the top 34% of 255 Zacks industries.

Since October 2021, the industry’s earnings estimate for the current year has gone up 5.2%, positioning it in the top 50% of the Zacks-ranked industries. The expected long-term earnings growth rate is currently pegged at 11.4%.

Price Performance

The industry has outperformed the Zacks S&P 500 composite as well as the Finance sector year to date. While the industry gained 7.7%, the Zacks S&P 500 composite and the sector have decreased 5.5% and 9.2%, respectively.

Zacks Investment Research
Image Source: Zacks Investment Research

Picking the Stocks

With the help of the Zacks Stock Screener, we have selected three P&C insurance stocks with an impressive Value Score of A or B and a Zacks Rank #1 (Strong Buy) or 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 stocks here.

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

Everest Re Group Limited writes property and casualty, reinsurance and insurance in the United States, Bermuda and international markets.  Everest Re has a huge market share in insurance and reinsurance market. It is expected to benefit from capital adequacy, financial flexibility, traditional risk management capabilities, improved pricing and focus on building a portfolio with mix toward product lines with better rate adequacy and higher long-term margins.

Everest Re’s dividend has increased at an eight-year CAGR (2014-2021) of 10.9%.  Also, the company’s consistent share buyback has been boosting its bottom line (bought back shares worth $225 million in 2021). The annualized total shareholder return on equity was 14.7% in 2021, exceeding the 2023 full-year target. It reflects the robust and well-diversified earnings power of Everest Re.

The stock currently has a P/B ratio of 1.11. The Zacks Consensus Estimate for current-year earnings has moved up 1.4% over the past 30 days. The consensus mark for 2022 and 2023 earnings suggest year-over-year increase of 14.7% and 15.4%, respectively. The expected long-term earnings growth rate is currently pegged at 10.1%. Shares have gained 3.1% year to date.

Arch Capital Group Limited 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.

Solid capital position shields ACGL from market volatility and aids in effective capital deployment.

ACGL currently has a P/B ratio of 1.4. The Zacks Consensus Estimate for current-year earnings has moved up 3% while the same for 2023 moved north by 5.7% over the past 30 days. The consensus mark for 2022 and 2023 earnings indicates year-over-year improvement of 26% and 14.1%, respectively. The expected long-term earnings growth rate is currently pegged at 10%. Shares have appreciated 3.5% year to date.

United Fire Group provides property and casualty insurance for individuals and businesses in the United States. Better pricing, expanding analytics capabilities, effectively managing portfolio by diversifying book of business, targeting attractive markets and products and growing profitable lines like E&S, surety and assumed reinsurance bode well for UFCS.

United Fire Group boasts paying quarterly dividends every quarter from March 1968.

UFCS currently has a P/B ratio of 0.79. The Zacks Consensus Estimate for current-year earnings has moved up by 122.2%, while the same for 2023 has increased 77% over the past 30 days. The consensus estimate for 2022 and 2023 earnings suggests year-over-year increase of 18.3% and 15%, respectively. Shares of the company have rallied 19.2% year to date.


In-Depth Zacks Research for the Tickers Above


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Everest Re Group, Ltd. (RE) - free report >>

United Fire Group, Inc (UFCS) - free report >>

Arch Capital Group Ltd. (ACGL) - free report >>