Looking back at 2018, the property and casualty (P&C) insurance industry’s optimism was kept alive on the back of the rising interest rates, a growing gross domestic product (GDP), lower tax incidence and a modest underwriting performance.
In 2019, the P&C insurers are expected to fall back on the improving economy, better employment scenario, net written premium growth and the ever-expanding levels of alternative capital. These are enough reasons for such insurers to stay upbeat about the soon-to-be-reported quarter.
However, catastrophic losses will persistently loom large on the insurers, posing a possible threat to their overall performance. Even though the P&C insurance industry has not faced any massive level of catastrophe losses so far, the January winter storms and an extreme cold weather (Polar Vortex) cost the United States nearly a billion dollars per Aon plc’s (AON - Free Report) catastrophe report on Feb 13, 2019.
Additionally, according to the catastrophe loss estimate released by The Allstate Corporation (ALL - Free Report) on Mar 22, 2019, the total estimated catastrophe losses for the January and February months stand at $299 million, pretax ($236 million after tax). Although insurers will bear the brunt of such catastrophic events through their quarterly performances, the same is not expected to create a huge dent in their underwriting capabilities.
With respect to the pricing environment, after experiencing 19 back-to-back quarters of soft pricing market, insurers began to increase prices from the fourth quarter of 2017. According to the analysts at Moody’s Investors Service, the pricing environment for this industry is likely to be modestly positive. Per the analysts, throughout 2019, rate increases are anticipated to exceed the loss cost trends in auto lines, roughly match the metric in the property lines and lag slightly in the commercial casualty lines.
Moreover, the insurers also built capital reserves owing to a not-so-active catastrophe in the past, which has been helping companies meet insurance claims. Also, the insurance industry boasts an all-time high capital level that will not only back the players to counter their near-term volatility and offset the impact of hostile occurrences but also sustain the industry’s growth momentum.
Given the accelerated rate hikes in the past couple of years, the insurers have reaped the benefits of the benign interest rate environment that has led to better investment results. However, the FOMC meeting on Mar 20, 2019 could not make investors rejoice about the future rate hikes as the Fed announced its decision to keep the interest rates unchanged and indicated that no more hikes will be coming this year unless conditions change significantly.
Nonetheless, with the current interest rate (ranging between 2.25% and 2.5%), the insurers can expect investment income to improve, thereby boosting revenues.
In 2019, GDP growth will slow down to 2.1% from 3% in 2018 (the projected slowdown in 2019 and beyond is mainly due to the trade war). Nonetheless, factors like unemployment rate (estimated at 3.7% in 2019) and the core inflation rate (expected at 2% through 2021) represent a bullish economic outlook.
The Property and Casualty Insurance industry is ranked at 101 (representing the top 39% of the Zacks Industry Rank for 250 plus industries) and has underperformed the Zacks S&P 500 composite’s rally of 14.3% year to date. While the industry has inched up 2.1%.
Here we focus on the two P&C insurers, namely Alleghany Corporation (Y - Free Report) and W.R. Berkley Corporation (WRB - Free Report) . While Alleghany deals in the property and casualty reinsurance and insurance products in the United States and internationally, W.R. Berkley operates as a commercial lines writer in the United States and globally. While the former has a market capitalization of $8.9 billion, the latter’s metric records $10.3 billion.
It will be interesting to note which stock scores higher in terms of fundamentals.
Investors interested in the same space can also take a look at Cincinnati Financial Corporation (CINF - Free Report) and Hallmark Financial Services, Inc. (HALL - 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 Alleghany has a Zacks Rank #3 (Hold), W.R. Berkley carries a Zacks Rank #4 (Sell).
Shares of W.R. Berkley have outpaced the industry year to date while that of Alleghany has underperformed the same. The W.R. Berkley stock has rallied 14.4% while the Alleghany stock has dipped 1.6%. Thus, W.R. Berkley 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 1.49, W.R. Berkley is overvalued with a reading of 1.88. Meanwhile, Alleghany is much cheaper with a trailing 12-month P/B multiple of 1.18. Thus, this round goes to Alleghany as its shares are underpriced than that of W.R. Berkley.
Return on Equity
W.R. Berkley’s 9.39% return on equity lies above the industry’s average of 7.15% while Alleghany’s 2.94% falls below the same. Return on equity — a profitability measure — reflects how efficiently the company utilizes its shareholders’ funds. Therefore, between W.R. Berkley and Alleghany, the former is comparatively better-positioned.
While W.R. Berkley’s debt-to-equity is higher than the industry average of 27.8%, Alleghany scores lower in this regard. Therefore, Alleghany with a leverage ratio of 21.7% has a visible edge over W.R. Berkley’s 50.9% ratio.
Combined ratio, the percentage of premiums paid out as claims and expenses, determines the underwriting profitability of an insurer.
Alleghany’s combined ratio was 103.2% in 2018 while W.R. Berkley’s came in at 95.3%. Thus, W.R. Berkley stays ahead in this round.
For Alleghany, the consensus mark for 2019 earnings per share is estimated to skyrocket 123.2% and for 2020, the company’s earnings are expected to increase 7.9%.
For W.R. Berkley, the consensus estimate for earnings per share in the current year is projected to decline 5.2% while for 2020, the bottom line is predicted to increase 9.7%.
In this case, Alleghany gains an edge over W.R. Berkley.
Alleghany is better placed than W.R. Berkley on the basis of rank, valuation, leverage ratio as well as growth projections. Whereas taking parameters like price performance, return on equity and the combined ratio into account, W.R. Berkley seems a healthier choice than Alleghany as a stock. Per our comparative analysis, Alleghany thus seems a more rewarding investment pick than W.R. Berkley.
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