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4 Value Picks From the Insurance Space for a Soft September

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Although the major indices gained on Sep 1, they started losing steam on Sep 2. Since then, the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite have declined 1.5%, 1.6% and 2%, respectively.

September has historically been a sluggish month for the stock market. While there are several theories for this uncanny phenomenon, the most common notion is that investors take time off during the summer months, leading to an overall decline in trading volumes. Stock Trader’s Almanac shows that September has been the weakest month for the S&P 500 since 1950 and since 1971 for Nasdaq.

Nonetheless, the insurance industry seems well-poised for growth amid this volatility. Though the industry has lost 6.5% year to date, it has outperformed the Finance sector and the Zacks S&P 500 composite’s decline of 16.5% and 18.7%, respectively. Moreover, the insurance industry is an important contributor to the country’s GDP and is poised for growth with economic expansion.

Zacks Investment Research
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Better pricing, increase in interest rate, exposure growth and solid capital position should help Arch Capital Group Ltd. (ACGL - Free Report) , American Financial Group, Inc. (AFG - Free Report) , MGIC Investment Corporation (MTG - Free Report) and Unum Group (UNM - Free Report) deliver operational excellence and in turn better returns for investors.

The insurance industry is rate sensitive. Insurers have been directing their funds into alternative investments like private equity, hedge funds, and real estate, among others, to sail through the low-rate environment. However, every cloud has a silver lining. The Fed has already hiked interest rates four times this year so far. While life insurers invest the premiums to ensure smooth claims payment, non-life insurers’ investment income is a component of their top line. Hence, insurers are direct beneficiaries of a rising rate environment.

The industry has been witnessing continued improvement in price. Per Willis Towers Watson’s 2022 Insurance Marketplace Realities report, rates will continue to rise but by a small margin.  Better pricing ensures improved premiums and prudent claims payment. Per Deloitte insights, global non-life premiums are estimated to grow 3.7% in 2022, while life insurance premium is estimated to increase 4% in 2022.

However, catastrophes and non-life insurers’ profitability are inversely related. Colorado State University (CSU) expects an active Atlantic hurricane season this year with 18 named storms. These include eight hurricanes and four major hurricanes. This year’s hurricane season could be about 120% of the average season per CSU. Nonetheless, prudent underwriting and solid reserve should help them withstand the blows.

Accelerated digitization is the need of the hour and needs heavy investment in technology.  Per Deloitte Insights, the technology budget is projected to increase 13.7% in 2022. Technological upgrades should continue to aid in seamless underwriting and claims processing while improving operational efficiency.

A sturdy capital position continues to support effective capital deployments like mergers and acquisitions, dividend hikes, special dividends and share buyback programs.

Notably, the insurance industry is currently undervalued. The price to book multiple, commonly used for valuing insurance stocks, is currently pegged at 1.66 compared with the S&P 500’s 5.55 and the sector’s 3.2. The industry’s earnings estimate for 2022 has increased 3.2% since July end, reflecting analysts’ optimism. 

Value Picks

It might be an uphill task to pick the right stocks for greater investment rewards. With the help of our Zacks Stock Screener, we have identified the best bets.

We have shortlisted four stocks, each with a Zacks Rank #2 (Buy) and an impressive Value Score of A or B. Each stock has witnessed positive estimate revision, reflecting analysts’ optimism about their prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Value Score identifies stocks that are undervalued. These value stocks have a long history of showing superior returns.

Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. Rate increases, new business opportunities, growth in existing accounts and increased persistency poise the insurer for growth,

Estimates for its 2022 bottom line have moved 1.3% north in the past four weeks. The Zacks Consensus Estimate for 2022 earnings indicates an improvement of 29.6% year over year. The expected long-term earnings growth rate is pegged at 10%. The insurer has a favorable VGM Score of B. The shares are currently trading at 1.4X price to book value.

Headquartered in Cincinnati, OH, American Financial Group engages primarily in property and casualty insurance, with a focus on specialized commercial products for businesses. Its strong operating profitability at the P&C segment, supported by consistent price increases and high renewal ratio, a stellar investment performance, better industry fundamentals and effective capital management auger well for growth.

AFG successfully increased its dividends for 17 straight years and paid 18 special dividends in 10 years reflecting its concerted efforts to reward shareholders.

American Financial’s combined ratio, the profitability measure of an insurer, has been better than the industry average for more than two decades. For 2022, AFG expects the combined ratio for the Specialty Property & Casualty Group to be between 85% and 87%.

American Financial expects core net operating earnings in 2022 to be in the range of $10.75 to $11.75 per share, banking on higher expected underwriting profit in the Specialty Casualty and Specialty Financial Groups and an average crop year. Net written premiums for 2022 are expected to be 9% to 13% higher than the $5.6 billion reported in 2021.

Estimates for the 2022 bottom line have moved north by 2.8% in the past 30 days. Shares of AFG are currently trading at 2.6X price to book value.

Chattanooga, TN-based Unum Group provides long-term care insurance, life insurance, employer- and employee-paid group benefits and related services. Premiums continue to benefit from high persistency levels in core business lines and strong sales volume along with solid benefits experience. The continued rollout of dental products and geographic expansion has been paying off as the acquired dental insurance businesses are growing in the United States and the United Kingdom.

Unum expects 2022 premiums to grow about 2%. Adjusted operating EPS is expected to increase 15-20% in 2022 and 45-55% by 2024.

UNM has made 13 dividend hikes in the last 12 years. Its dividend yield is better than the industry average. It expects to buy back $200 million worth of shares annually through 2024.

The Zacks Consensus Estimate for 2022 earnings has moved 5.5% north in the past 30 days and implies year-over-year growth of 38.6%. The expected long-term earnings growth rate is 14.9%, better than the industry average of 10%. The insurer has a favorable VGM Score of B. Shares are currently trading at 0.8X price to book value.

Based in Milwaukee, WI MGIC Investment is the parent company of Mortgage Guaranty Insurance Corporation, the largest private mortgage insurer in the United States.

Higher premiums, a decline in claim payments, decreasing delinquencies, an improving housing market, outstanding credit quality and new business augur well for growth. MTG anticipates new business, combined with increasing annual persistency, to result in the continued growth of the insurance-in-force portfolio.

The Zacks Consensus Estimate for 2022 earnings has moved 4.3% north in a month’s time and indicates year-over-year growth of about 39%. The expected long-term earnings growth rate is 5%. The insurer has a favorable VGM Score of B. Shares are currently trading at 0.9X price to book value.

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