Shares of Alleghany Y have lost 9.9% compared with the industry's decline of 11.6% in a year’s time.
Alleghany is being adversely impacted by escalating costs and exposure to catastrophe losses with minimum return, which, in turn, are straining margins.
Let’s take a detailed look at the factors hurting the stock.
As a property and casualty insurer, Alleghany's reinsurance and insurance subsidiaries are exposed to natural catastrophe events, such as hurricanes, windstorms and earthquakes and man-made catastrophes events as terrorist attacks, bankruptcies or a marine or aviation disaster.
In October 2019, Typhoon Hagibis caused widespread property damage and flooding, primarily in Japan. It was preceded by Typhoon Faxai. The civil unrest in Chile caused widespread property damage in the fourth quarter of 2019. Hurricane Dorian caused widespread property damage and flooding in August and September 2019, primarily in the Bahamas, North Carolina and South Carolina. The catastrophe losses amounted to $315 million. Such unpredictable cat occurrences result in significant losses and have an adverse effect on the financial condition and the underwriting results are always exposed to volatility.
Alleghany has been witnessing escalating expenses owing to increase in net loss and loss adjustment expenses, commissions, brokerage and other underwriting expenses, other operating expenses, corporate administration, amortization of intangible assets and interest expense. In 2019, expenses increased 15.6% year over year to $7.9 billion. Increase in expenses weigh on the company’s margins.
Alleghany’s trailing 12-month return on equity of 3.9% compares unfavorably with 6.8% return on equity for the industry. This simply reflects the company’s relative inability to utilize its shareholders’ funds and generate profit.
The life insurer’s interest coverage ratio of 9.9 compares unfavorably with the industry average of 25.8, which also raises the financial risk.
The company has a poor earnings surprise history. It came up with average trailing four-quarter negative surprise of 20.07%.
Negative Estimate Revisions and Lackluster Momentum Score
The Zacks Consensus Estimate for current-year earnings has been revised downward by 10.8% in the past 60 days to $40.70.
It has an unfavorable Growth Score of C, which indicates lower growth prospects of the company.
The stock has a VGM Score of C, which makes it unattractive.
Additionally, Alleghany carries a Zacks Rank #5 (Strong Sell).
Stocks to Consider
A few better-ranked stocks in the property & casualty insurance sector are Donegal Group Incorporation DGICA, First American Financial Corporation FAF and Cincinnati Financial Corporation CINF. While Donegal Group and First American Financial sport a Zacks Rank #1 (Strong Buy), Cincinnati Financial carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Donegal Group, First American and Cincinnati Financial surpassed estimates in each of the last four quarters, with the average positive surprise being 271.06%, 17.68% and 17.86% respectively.
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