The curtain has already been raised for the second quarter earnings season with banks started reporting their quarterly results. The insurance industry is all set to announce its results shortly.
Underwriting results, the major indicator of profitability of any insurer, is likely to be affected. This is due to 16 severe wind and hail catastrophe events which occurred in April and May. The catastrophe losses not only have deteriorated the combined ratio but have also been a drag on the bottom line.
The insurance industry has been building its capital reserve, courtesy a benign catastrophe environment. We expect some prudent underwriting standards to guard the insurers from erosion of the same.
The interest rate environment has been slowly improving with Fed (Federal Reserve) raising interest rate thrice in three consecutive quarters. This reflects Fed’s confidence in the improving U.S. economy. An increased rate positively impacts the net investment income, a major component of an insurer’s top line. A broader invested asset base and alternative asset classes are other positives.
Though the Property and Casualty Insurance industry is currently ranked at #229 (lies in the bottom one-third of the Zacks Industry Rank for the 252+ industries), it has outperformed the S&P 500 in the last one-year period by registering a gain of 15.64%. The index, on the other hand, climbed 13.36%.
In this scenario, we focus on two leading property and casualty insurers ahead of the earnings release by the insurers. The Allstate Corporation (ALL - Free Report) is the second-largest property-casualty (P&C) insurer and the largest publicly-held personal lines carrier in the U.S., while Chubb Limited (CB - Free Report) is one of the world’s largest providers of property and casualty (P&C) insurance and reinsurance and the largest publicly traded P&C insurer. While Allstate has a market capitalization of $32.46 billion, Chubb has a market capitalization of $67.79 billion.
Both the stocks carry a Zacks Rank #3 (Hold). It will be interesting to note which stock is better positioned in terms of fundamentals.
Some better-ranked stocks from the same industry are Progressive Corp (PGR - Free Report) , flaunting a Zacks Rank #1 (Strong Buy) and Everest Re Group Ltd. (RE - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Allstate has outpaced the industry with its shares rallying 28.44%, whereas Chubb has underperformed the industry with merely 12.29% gain. Allstate emerges a clear winner in this round
The price to book value metric is the best multiple, used for valuing insurers. Compared with Property and Casualty Industry’s P/B ratio of 1.44, Allstate is over-priced with a reading of 1.67. Meanwhile, Chubb is much cheaper with a trailing 12-month P/B multiple of 1.38. This round goes to Chubb as Chubb’s shares are cheaper than Allstate’s.
Both Allstate and Chubb have lower debt-to-equity versus the industry average of 32.14%. Chubb with a leverage ratio of 28.45 has an edge over Allstate with the leverage ratio of 29.99%
In the last one-year period, Allstate’s dividend yield was 1.96%, while Chubb’s was 1.66%. Both have a dividend yield that outpaces the industry’s average of 0.50%. On a comparative basis, Allstate has an edge over Chubb.
Earnings Surprise History
With respect to the companies’ surprise history, Allstate has surpassed the Zacks Consensus Estimate in the last four quarters with an average beat 27.77%. Chubb on the other hand delivered positive surprises in three of the last four quarters with a four-quarter average beat of 5.56%.
Again Allstate has an edge over Chubb
Earnings Estimate Revisions and Growth Projections
Notably for both companies, The Zacks Consensus Estimate has moved south for 2017 but rallied for 2018.
Allstate 2017 estimates have moved down 0.64% but have increased 1.2% for 2018 in the last 60 days. Chubb’s 2017 estimates on the other hand have moved down 0.48% but have improved by a cent for 2018 in the last 60 days.
For Chubb, The Zacks Consensus Estimate for earnings is $10.30 for 2017, reflecting year-over-year growth of 1.78%. For 2018, the Zacks Consensus Estimate for earnings is pegged at $10.68, representing year-over-year growth of 3.65%. Chubb has long-term expected earnings per share growth of 10.0%.
For Allstate, The Zacks Consensus Estimate for earnings is $6.20 for 2017, reflecting year-over-year growth of 27.24%. For 2018, the Zacks Consensus Estimate for earnings is pegged at $6.96, representing year-over-year growth of 12.24%. Chubb has long-term expected earnings per share growth of 8.0%.
Allstate has once more edged over Chubb in respect of growth projections.
Per the proven model, Chubb is likely to beat on earnings this time because it has the right combination of a favorable Zacks Rank as well as an Earnings ESP of +0.40.
However, our model does not conclusively show that Allstate is likely to beat on earnings this quarter. While a Zacks Rank #3 increases the predictive power of ESP, an Earnings ESP of 0.00% makes prediction difficult.
Chubb is a clear winner here.
Allstate holds an edge over Chubb on price performance, dividend yield, earnings surprise history and growth projections. While considering parameters like valuation, leverage and an Earnings ESP, Chubb seems better than Allstate. Based on our comparative analysis, Allstate presently has an edge over Chubb.
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