The multi-line insurance industry has put up a favorable performance so far this year, led by gain in insurance pricing, industry consolidation, solid capital levels, new product launches, diversified business lines coupled with not so severe catastrophe activity.
Despite low interest rate regime, which drives insurers’ net investment income, the multi-line insurance industry is poised for growth.
Against this backdrop, lets analyze American International Group, Inc. (AIG - Free Report) and MetLife, Inc. (MET - Free Report) , both having market capitalization of nearly $46 billion. These stocks carry Zacks Rank #1 (Strong Buy) and #2 (Buy), respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Driving the Multi-line Insurance Industry
The industry is witnessing an increase in premium pricing after suffering from low prices for several years. It remains well capitalized and financially prepared to pay for large-scale losses (if any occurs) in 2019 and beyond. This surplus capital is also expected to fuel increased consolidation in the industry as players seek to increase market share, achieve geographical diversification, change product mix and grow in niche areas.
Also, increased use of technology, like blockchain, AI, advanced analytics, telematics, cloud-computing and robotic process automation to expedite business operations and save unnecessary delay and cost, which would increase business efficiency and reinforce good enterprise resource planning.
Let's see how American International and MetLife are placed in the rapidly growing industry.
Both the companies have outperformed the industry (up 11.1%) so far this year. While shares of MetLife have gained 17.7%, American International has rallied 34%.
Other companies in the same space, Prudential Financial, Inc. (PRU - Free Report) and W. R. Berkley Corp. (WRB - Free Report) have gained 22% and 30.5%, respectively, over the same time frame.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months for MetLife and American International is 10.2% and 2.48%, respectively. Further, with industry’s average of 7.1%, MetLife is more efficient in using shareholders’ funds.
Earnings Estimate Revisions & Growth Projections
Analysts seem to be bullish on American International Group’s financial performance. Thus, the Zacks Consensus Estimate for 2019 earnings of $4.96 has moved 1.4% upward over the past 30 days. Also, the same indicates growth of 324% year over year. The stock has a long-term expected earnings growth rate of 11%, compared with the industry’s growth of 11.5%.
Meanwhile, MetLife’s consensus estimate for 2019 earnings of $5.61 has marginally gone up by 0.4% over the past 30 days and it implies growth of 4.1%. The stock has a long-term expected earnings growth rate of 8.5%.
Therefore, this is in favor of American International.
American International’s net debt-to-capital ratio is 34% compared with MetLife’s 3.9%. The industry’s average for the same is 22.5%. Net debt is calculated by deducting cash and cash equivalents from a company’s debt.
In case of Metlife, the ratio is lower than the industry average, implying the company’s low debt levels in its capital structure. This reduces the company’s financial risk and provides strength to its balance sheet.
The trailing 12-month price to tangible book value per share (P/B) of MetLife is 0.94, and that of American International is 0.75, compared with the industry’s P/B level of 0.80.
Thus, American International looks more attractively valued here.
Our comparative analysis indicates that MetLife is placed better on leverage and profitability front, while American International scores better on valuation, estimate revision and past performance.
Stocks that have been witnessing positive estimate revisions tend to be solid bets. In this context, American International looks better than MetLife.
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