Improving economy, rising interest rates, a noteworthy tax reform along with significantly lower catastrophe loss have given the property and casualty (P&C) insurers enough reasons to cheer for after facing numerous challenges in 2017. Banking on such positives, the P&C insurance industry is anticipated to deliver better-than-expected results as the year progresses.
Per a report by Fitch Ratings, the insurance industry is expected to regain its substantial underwriting profitability in 2018, albeit at a slow pace. Moreover, combined ratios are likely to improve and might as well come close to breakeven. Thus, insurance players can expect a better year in terms of catastrophe loss compared with the tumultuous journey in 2017.
With respect to interest rates, the gradual improvement in the same has come as a blessing for insurers with the Fed indicating two more rate hikes this year, thus lending an impression of aggressive rate raises. Hence, an improving rate environment will aid investment income, an important component of insurers’ revenues.
The previous month’s Fed meeting buoyed hope among investors as the Fed officials remain on track to augment rates at their June meeting.
This apart, inflation has finally reached the Fed’s 2% target after unable to achieve the same for the past six years.
Amid the rising interest rate environment, the property and casualty (P&C) insurers will also benefit from a broader invested asset base and alternative asset classes.
Other factors like lower tax incidence, a growing GDP and an improving employment scenario are likely to aid insurers’ performance, going forward.
The Property and Casualty Insurance industry is ranked at #157 (among bottom 38% of the Zacks Industry Rank for 267 industries) and it has underperformed the S&P 500 index’s growth of 3.7% year to date, registering a slip of 1.9%.
Here we focus on two P&C insurers, namely AXIS Capital Holdings Limited (AXS - Free Report) and The Hanover Insurance Group, Inc. (THG - Free Report) . While AXIS Capital provides various specialty insurance and reinsurance products worldwide, Hanover Insurance offers various property and casualty insurance products and services in the United States and internationally. While the former has a market capitalization of $4.8 billion, the latter’s metric records $5.2 billion.
It will be interesting to note which stock scores better in terms of fundamentals.
Investors interested in the same space can also take a look at NMI Holdings, Inc. (NMIH - Free Report) and RLI Corp. (RLI - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While AXIS Capital holds a Zacks Rank #2 (Buy), Hanover Insurance carries a Zacks Rank #4 (Sell).
Return on Equity
Hanover Insurance’s return on equity of 8.33% lies above the industry’s average of 5.25% as well as AXIS Capital’s (3.42%). Return on equity, a profitability measure, reflects how efficiently the company utilizes shareholders fund. Therefore, between Hanover Insurance and AXIS Capital, the latter is comparatively better-positioned.
Both AXIS Capital and Hanover Insurance have outpaced the industry year to date. While shares of AXIS Capital have rallied 15.2%, the Hanover Insurance stock has gained 13.2%. Thus, AXIS Capital emerges a clear winner here.
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 1.40, Hanover Insurance is overvalued with a reading of 1.79. Meanwhile, AXIS Capital is much cheaper with a trailing 12-month P/B multiple of 1.07. This round again goes to AXIS Capital as its shares are underpriced than Hanover Insurance’s.
While AXIS Capital’s debt-to-equity is higher than the industry average of 28.4%, Hanover Insurance scores lower in this regard. Hence, Hanover Insurance with a leverage ratio of 27.0% has an edge over AXIS Capital’s 28.9% ratio.
Both companies have a dividend yield that outshines the industry’s 0.49% average. While AXIS Capital’s dividend yield was 2.69% in a year, Hanover Insurance’s tally was 1.77%. Comparatively, AXIS Capital stays ahead of Hanover Insurance in this respect.
Combined ratio, the percentage of premiums paid out as claims and expenses, determines the underwriting profitability of an insurer.
AXIS Capital’s combined ratio was 90.8% in first-quarter 2018 while Hanover Insurance’s came in at 96.9%. AXIS Capital wins this round.
Earnings Surprise History
As far as the companies’ surprise history goes, AXIS Capital surpassed the Zacks Consensus Estimate in two of the last four quarters with an average beat of 5.11% while Hanover Insurance delivered a positive surprise in all the trailing four quarters with an average positive earnings surprise of 39.86%.
Hence, Hanover Insurance outshines AXIS Capital in this round.
Earnings Estimate Revisions and Growth Projections
AXIS Capital’s 2018 estimates have moved 8.9% north and 4.2% up for 2019 in the last 60 days. Meanwhile, the Zacks Consensus Estimate for Hanover Insurance’s current-year earnings has remained constant while the same for 2019 bottom line has been revised 3.3% downward.
For AXIS Capital, the consensus mark for 2018 earnings per share is estimated to skyrocket 243.5% on 24.16% revenue improvement. For 2019, the company’s earnings are expected to increase 10.5% on a 0.2% top-line decrease.
For Hanover Insurance, the Zacks Consensus Estimate for earnings per share in 2018 is projected to soar by 80.4% on 5.7% revenue rise. For 2019, the bottom line is predicted to climb 2.3% on 4.3% revenue improvement.
In this case, AXIS Capital gains advantage over Hanover Insurance.
AXIS Capital is better placed than Hanover Insurance on the basis of a bullish rank, strong return on equity, solid dividend yield, valuation, higher price performance, combined ratio as well as encouraging earnings estimate revisions plus growth projections. While taking into account yardsticks like an impressive earnings surprise history and a lower debt-to-equity ratio, Hanover Insurance seems healthier than AXIS Capital. Per our comparative analysis, AXIS Capital seems a more rewarding investment option than Hanover Insurance.
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