Riding high on an improving economic backdrop, increasing interest rates and a benign catastrophe environment, the insurance industry seems well-placed to facilitate players in ramping up their growth profile.
Recently, the Fed has raised the interest rate by 25 basis points under the new chairman Jerome Powell and the rate now stands at 1.75%. The Federal Reserve has hinted at two more hikes in 2018 followed by three in 2019 and two in 2020, thus pushing up the rate to 3.4%.
An increased rate is expected to positively impact the net investment income, a major component of an insurer’s top line. A broader invested asset base and alternative asset classes are other upsides.
Underwriting results — the major indicator of profitability for any insurer — are expected to improve on the back of a favorable catastrophe setting. Though, the first quarter escaped the wrath of Mother Nature, there were a few cat events like California mudslide and northeast winter storms. Chubb Limited (CB - Free Report) has estimated $305 million of cat loss for the first quarter of 2018.
Nonetheless, price increases by insurers will help generating improved premiums.
Also, President Donald Trump’s tax reform policy, an overhaul of tax code after 31 years, lowers the corporate tax burden. The tax rate was slashed to 21% from 35%, calling for a $1.5-trillion tax cut.
Interestingly, due to lower tax incidence, net profit available to shareholders will be higher, thereby leaving room for higher dividend payout by the companies.
The Property and Casualty Insurance industry is ranked at #200, denoting the bottom half of the Zacks Industry Ranks for 265 plus industries. However, the industry’s registered rise of 1.3% has outperformed the S&P 500 index’s loss of 0.8% year to date.
Here we focus on two property and casualty insurers, namely The Travelers Companies, Inc. (TRV - Free Report) and The Progressive Corporation (PGR - Free Report) . While the former with a market capitalization of $37.88 billion provides commercial and personal property plus casualty insurance products and services in the United states and internationally, the latter provides personal and commercial auto insurance, residential property insurance as well as other specialty property-casualty insurance and related services, primarily in the United States with a market cap of $35.7 billion.
A better-ranked stock from the same industry is CNA Financial Corporation (CNA - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1Rank stocks here.
Travelers carries a Zacks Rank #2 (Buy) while Progressive has a Zacks Rank #3 (Hold). Travelers emerges a clear winner in this round.
Shares of Progressive have soared 55.9%, outperforming both Travelers’ rally of 15.9% and the industry’s increase of 17.2% in a year. The Progressive stock undoubtedly performs better with this metric.
The price to book value metric is the best multiple used for valuing insurers because of its variations in quarterly earnings. The industry’s P/B ratio is 1.43. However, both Progressive and Travelers with a reading of 3.84 and 1.59, respectively, are overvalued compared with the industry’s tally. Yet with a comparatively lower P/B ratio, Traveler’s shares are cheaply priced and hence the stock wins this round.
Travelers has a lower debt-to-equity ratio of 27.6 compared with the industry average of 29.1% and Progressive’s leverage ratio of 35.6. Therefore Travelers has a visible edge over Progressive here.
Return on Equity
Progressive with a return on equity of nearly 16% exceeded the industry average of 4.8% as well as Travelers’s reading of 8.6%. Return on equity is a profitability measure, identifying how the company is effectively utilizing its shareholders’ money. Hence Progressive wins hands down this time.
Both Travelers and Progressive underperform the industry’s dividend yield of 6.73%. Yet with 2.07% yield, Travelers scores higher than Progressive’s yield of 1.84%.
Combined ratio, the percentage of premiums paid out as claims and expenses, determines an insurer’s underwriting profitability.
Progressive’s combined ratio was 93.4 in 2017 while Travelers’s is 97.9. Thus Progressive edges past Travelers with this parameter.
Both companies are set to report their earnings in the latter half of this month. Per our proven model, Travelers is set to deliver a positive surprise with the right combination of a favorable Zacks Rank of 2 and an Earnings ESP of +2.00%. While Progressive’s Earnings ESP of 0.00% makes prediction inconclusive although it has a favorable Zack Rank of 3.
Earnings Surprise History
As far as the companies’ surprise history goes, Travelers earnings have surpassed the Zacks Consensus Estimate in two of the last four quarters with an average beat of 43.06%.
Progressive’s metric too has outpaced the consensus mark in the last two quarters with an average four-quarter surprise of 5.01%.
Travelers visibly beats Progressive in this round of the comparison game.
Earnings Estimate Revisions and Growth Projections
Progressive’s 2018 earnings estimates have moved 5.1% north in the last 30 days. While the Zacks Consensus Estimate for 2019 has been revised 2.6% upward. The consensus mark for 2018 reflects 40.7% growth on 17.5% revenue increase. For 2019, the bottom line is expected to rise 5.2% on 12% higher revenues. The projected long-term earnings growth is pegged at 7.3%.
For Travelers, the consensus mark for 2018 earnings has been raised 0.3% in the last 30 days while the same for 2019 has been revised upward only by a cent. The consensus estimate for 2018 reflects 45.9% surge on 2.6% revenue improvement. For 2019, the bottom line is likely to increase 6.2% on 3.9% higher top line. The anticipated long-term earnings growth stands at 7.5%.
This round lends equal weightage to both competitors.
Travelers scored higher than Progressive on the basis of a solid Zacks Rank, valuation, sturdy leverage ratio, strong dividend yield and a robust earnings surprise history. However, considering yardsticks like price performance, return on equity or a combined ratio, Progressive seems better-equipped than Travelers. Per our comparative analysis, Travelers is thus, a more economically feasible investment option for investors than Progressive.
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