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RLI or RNR: Which P&C Stock is Better-Placed at the Moment?

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The Zacks Property and Casualty Insurance industry is likely to benefit from improved pricing, increased technology advancements, exposure growth, underwriting profitability, favorable reserve development and global expansion as well as an impressive solvency level. However, catastrophe losses might have put pressure on P&C insurers.

The industry has risen 9.2% in the past year against the Zacks S&P 500 composite’s decline of 17.1% and the Finance sector’s 11.9% fall.

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Here we focus on two property and casualty insurers, namely RLI Corp. (RLI - Free Report) and RenaissanceRe Holdings Ltd. (RNR - Free Report) .

RLI Corp., with a market capitalization of $5.8 billion, underwrites property and casualty insurance in the United States and internationally. RenaissanceRe, with a market capitalization of $7.9 billion, provides reinsurance and insurance products in the United States and internationally. Both insurers carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Per the Global Insurance Market Index by Marsh, global commercial insurance prices increased 6% in the third quarter of 2022. This marked the 20th consecutive quarter in which composite pricing rose, continuing the longest run of increases since the inception of the index in 2012. Price hikes, operational strength, higher retention, strong renewal and the appointment of retail agents should help write higher premiums.

Per Deloitte Insights, gross premiums are projected to increase six times to $722 billion by 2030. Per the report, China and North America should account for more than two-thirds of the global market.

The P&C insurers remain exposed to catastrophe loss from natural disasters and weather-related events, which induce volatility in their underwriting results. Colorado State University expects an active Atlantic hurricane season with 18 named storms this year. These include eight hurricanes and four major hurricanes.

Exposure growth, better pricing, prudent underwriting and favorable reserve development will help withstand the blow. Also, frequent occurrences of natural disasters should accelerate the policy renewal rate.

The solid capital level continues to aid insurers in pursuing strategic mergers and acquisitions, investing in growth initiatives, engaging in share buybacks, increasing dividends or paying out special dividends. Consolidation is likely to continue as players look to diversify their operations into new business lines and geographies.

With the reopening of the economy and robust capital level of the insurers, 2021 witnessed 869 deals, which increased 40% from 620 in 2020, while the total deal value surged 165% to $57.5 billion per Deloitte. However, with high inflation and a rise in interest rates (the Fed has already made five rate hikes this year), the momentum in the M&A environment is likely to slow down. Per Deloitte, so far this year, the number of deals dropped about 30% while deal value dropped by about 25% and is estimated to hit a low point.

The interest rate environment has started to improve. In November 2022, Fed officials declared to raise interest rates by 75 basis points, shifting the target range to 3.75%-4%. This marked the sixth consecutive rate hike in 2022. Thus, insurers are poised to benefit as net investment income is an important component of their top line.

To improve scale and efficiencies, the insurance industry is now adopting technological changes like blockchain, Artificial Intelligence (AI), advanced analytics, telematics, cloud computing, and robotic process automation. Deloitte’s Global survey projects insurers’ technology budget to increase 13.7% in 2022.

Now let’s take a look at how RNR and RLI are poised.

Price Performance    

RLI Corp. has gained 18.7% in the past year, outperforming RenaissanceRe’s gain of 9.1% and the industry’s increase of 9.3%.

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Return on Equity (ROE)    

RLI Corp., with a return on equity (ROE) of 17.7%, exceeds RenaissanceRe’s ROE of 4.7% and the industry average of 6.7%.

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The price-to-book value is the best multiple used for valuing insurers. Compared with RLI Corp.’s P/B ratio of 4.16, RenaissanceRe is cheaper, with a reading of 1.93. The P&C insurance industry’s P/B ratio is 1.51.

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RenaissanceRe’s debt-to-capital ratio of 19.3 is higher than RLI Corp.’s reading of 12.5 but lower than the industry average of 20.5. Therefore, RLI has an advantage over RNR on this front.

Earnings Surprise History  

RLI has outpaced expectations in each of the four trailing quarters, the average surprise being 43.32%. RNR surpassed earnings estimates in two of the last four quarters and missed in the other two, delivering an average negative earnings surprise of 3.32.

Growth Projection     

Earnings growth and stock price gains often indicate a company’s strong prospects.

The Zacks Consensus Estimate for RenaissanceRe’s 2022 earnings implies a 126.7% rise from the year-ago reported figure, while that of RLI Corp. suggests an increase of 16.2% from the prior-year reported number.

Therefore, RenaissanceRe is at an advantage on this front.

Combined Ratio      

RLI Corp.’s combined ratio was 85.3 in the first nine months of 2022, whereas that of RenaissanceRe was 103.6% in the said time frame. Thus, the combined ratio of RLI betters that of RNR.

To Conclude

Our comparative analysis shows that RLI Corp. is better positioned than RenaissanceRe with respect to price and return on equity, leverage, combined ratio and earnings surprise history. Meanwhile, RenaissanceRe scores higher in terms of valuation and growth projection. With the scale significantly tilted toward RLI, the stock appears to be better poised.

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