A benign catastrophe environment, is largely responsible for profitability of the property and casualty industry, strongly places the players at present. Other favorable factors like improving rate environment, tax overhaul and economic progression should boost insurers for growth.
After last year’s severe damages, the property and casualty insurers are benefiting from a benign cat environment. While the first quarter had to weather the California mudslide, two severe wind and hailstorms struck Texas and some parts of Southeastern states in April. A not so active cat setting continues to support underwriting results for insurers. Price hikes are further adding to this upside.
A rising interest rate environment is aiding better investment results. The Fed chairman Jerome Powell announced intentions of three rate hikes this 2018. A raised 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 positives.
Also, the tax revision, which slashed the corporate tax rate to 21% from 35%, will act as an impetus to industry players. A lower tax burden widens scope for more capital deployment, evident from dividend hikes, special dividends as well as share buybacks pursued by many insurers.
The Property and Casualty Insurance industry is ranked at #162 (denoting the bottom half of the Zacks Industry Rank for 265 plus industries) and has underperformed the S&P 500 index’s growth of 3.2% year to date with a 2.3% decline. The industry is currently undervalued compared with elite the S&P 500 index.
Here we focus on two property and casualty insurers, namely Selective Insurance Group, Inc. (SIGI - Free Report) and Mercury General Corporation (MCY - Free Report) .
While the former with a market capitalization of $3.4 billion provides insurance products and services in the United States, the latter engages in writing personal automobile insurance in the United States and has a market cap of $2.6 billion.
Two better-ranked stocks from the same industry are Alleghany Corporation (Y - Free Report) and AXIS Capital Holding Limited (AXS - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here..
Selective Insurance Group carries a Zacks Rank #3 (Hold) while Mercury General has a Zacks Rank #5 (Strong Sell). Thus, Selective Insurance Group emerges a clear winner in this round.
Selective Insurance Group has outperformed both Mercury General and the industry in a year. While shares of Selective Insurance Group have rallied 13.4%, the Mercury General stock has declined 16.3%. Selective Insurance Group wins this round too.
The price to book value metric is the best multiple used for valuing insurers. Compared with the Property and Casualty Industry’s P/B ratio of 1.39, both are overvalued. Mercury General with a reading of 1.55 are cheaper than Selective Insurance Group with a trailing 12-month P/B multiple of 2.03. This round understandably goes to Mercury General as its shares are underpriced.
Mercury General boasts a lower debt-to-equity ratio of 22.1 compared with the industry average of 28.4 and Selective Insurance Group’s leverage ratio of 29.8. Therefore, Mercury General has a visible edge over Selective Insurance Group here.
Return on Equity
Selective Insurance Group with a return on equity of 9.6% exceeded the industry average of 5.3% as well as Mercury General’s reading of 4.8%. Return on equity is a profitability measure, identifying how the company is effectively utilizing its shareholders’ money. Hence, Selective Insurance Group is better off in this round.
Mercury General’s dividend yields 5.3%, outperforming the industry average of 0.5% and Selective Insurance Group’s yield of 1.3%.
Mercury General wins this round hands down.
Combined ratio, the percentage of premiums paid out as claims and expenses, determines the underwriting profitability of an insurer.
Selective Insurance Group’s combined ratio was 99.2% in the first quarter of 2018 while Mercury General’s was 103.8. Hence, the former beats the latter on this front.
Earnings Surprise History
As far as the companies’ surprise history goes, Selective Insurance Group surpassed the Zacks Consensus Estimate in three of the last four quarters with an average beat of 0.31%.
Although Mercury General outpaced the expectations in two of the last four quarters, the average four-quarter surprise was a negative 15.28%.
This round is noticeably gripped by Selective Insurance Group.
Earnings Estimate Revisions and Growth Projections
Selective Insurance Group’s 2018 earnings estimates have been moved up by a cent in the last 30 days. Whereas the consensus estimate for Mercury General has been revised 20.8% downward in the last 30 days.
For Selective Insurance Group, the consensus mark for current-year earnings per share is estimated to grow 7.9% while the same for Mercury General translates into a 20.7% year-over-year increase.
The expected long-term earnings growth rate for Selective Insurance Group is pegged at 16.2% while for Mercury General, stands at 34.8%, both outperforming the industry average of 11.4%.
Here, Mercury General gains advantage over Selective Insurance Group.
Selective Insurance Group scored higher than Mercury General on the basis of Zacks Rank, price performance, return on equity, combined ratio and earnings surprise history. However, considering parameters like dividend yield, valuation, leverage and earnings estimate revisions as well as growth projections, the latter seems on a stronger plane than the former. Per our comparative analysis, Selective Insurance Group is thus a more alluring and feasible investment option than Mercury General.
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