The property and casualty insurance industry is presently well placed, given a not so active catastrophe environment likely to cushion underwriting results. Measuring insurers’ profitability, underwriting results should gain traction from this favorable scenario. The Property and Casualty Insurance industry is ranked at #84, positioning itself in the top 33% of the Zacks Industry Rank for 255 plus industries.
Insurers braved price hikes following an active 2017 catastrophe environment. Improved pricing will help curb competition. Also, occurrence of natural disasters might lead to an accelerated rate of policy renewals and more new policy writings. Strengthening labor market, increase in wages, improving employment scenario, higher disposable income and encouraging economic data raise optimism.
P&C insurers don’t benefit significantly from a rising rate environment as their business models are not too sensitive to interest rates. However, investment income is a component of the insurers’ top line. Thus, acceleration of the pace of rate hikes might translate into some advantage for the industry. This year already saw two rate hikes by the Fed, which has raised interest rate seven times since December 2015. The Central Bank announced its intension for one more hike this year (a possibility of two also remains), thrice in 2019 and twice in 2020.
Also, a lower tax burden owing to the new tax reform implementation slashed the corporate tax rate to 21% from 35%. This in turn, should help expand margin as well as widen scope for more capital deployment via dividend hikes, special dividends and share buybacks pursued by many insurers.
Though the industry has grown 7.4% in a year, it underperformed the S&P 500 index’s gain of 14.2%. The industry is currently undervalued compared with the elite S&P 500 index. Given the growth prospects and undervaluation, this space offers attractive investment opportunities.
Here we focus on two property and casualty insurers, namely First American Financial Corporation (FAF - Free Report) and RenaissanceRe Holdings Ltd. (RNR - Free Report) .
While the former with a market capitalization of $5.7 billion provides financial services, largely title insurance, the latter provides reinsurance and insurance coverages and has a market cap of $4.8 billion.
Two better-ranked stocks from the same industry are Alleghany Corporation (Y - Free Report) and HCI Group, Inc. (HCI - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
First American Financial carries a Zacks Rank #2 (Buy) while RenaissanceRe has a Zacks Rank #3 (Hold). Thus, First American Financial Group emerges a clear winner in this round.
First American Financial has outperformed both RenaissanceRe and the industry in a year. While shares of First American Financial have rallied 14.8%, the RenaissanceRe stock has declined 13.7%. First American Financial 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 1.32, First American Financial is overvalued with a reading of 1.6. RenaissanceRe with a reading of 1.2 is cheaper and thus, this round understandably goes to RenaissanceRe as its shares are underpriced.
Both First American Financial and RenaissanceRe have lower debt-to-equity ratio compared with the industry average of 28.4. First American Financial with a reading of 21.1 betters RenaissanceRe’s leverage ratio of 22.3. Therefore, First American Financial has a visible edge over RenaissanceRe here.
Return on Equity
First American Financial with a return on equity of 14.3% exceeded the industry average of 5.3% as well as RenaissanceRe’s reading of a negative 5.8%. Return on equity is a profitability measure, identifying how the company is effectively utilizing its shareholders’ money. Hence, First American Financial leads this round.
First American Financial’s dividend yields 2.96%, outperforming the industry average of 0.52% and RenaissanceRe’s yield of 1.1%.
First American Financial wins this round hands down.
Earnings Surprise History
As far as the companies’ surprise history is concerned, First American Financial’s earnings surpassed the Zacks Consensus Estimate in the last four quarters with an average beat of 8.33%. While RenaissanceRe outpaced the expectations in three of the last four quarters with an average four-quarter positive surprise of 17.66%.
This round is noticeably gripped by First American Financial.
Earnings Estimate Revisions and Growth Projections
RenaissanceRe’s 2018 earnings estimates have been moved 5.5% north in the last 60 days. Whereas, there was no earnings momentum for First American Financial.
For RenaissanceRe, the consensus mark for current-year earnings per share is estimated to skyrocket 228% while the same for First American Financial translates into a 59.3% year-over-year increase.
The expected long-term earnings growth rate for RenaissanceRe is pegged at 9.5% while for First American Financial, stands at 13%.
Here, RenaissanceRe gains advantage over First American Financial.
While First American Financial scored higher across most categories RenaissanceRe bettered in terms of valuation and earnings estimate revisions plus growth projections. First American Financial is thus a more exciting and viable investment option than RenaissanceRe.
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