The property and casualty (P&C) insurance industry has performed well so far this quarter driven by a not-so-active catastrophe environment, better pricing, strong capital level and improved product and services.
The industry has gained 3.1% quarter to date, outperforming the Zacks S&P 500 composite’s increase of 0.8% and the Finance sector’s increase of 0.2%. Also, the property and casualty insurance industry is ranked #62 and is housed within the top 24% of the Zacks Industry Rank for 255 plus industries.
Also, the industry is currently undervalued compared with the Zacks S&P 500 composite.
The industry’s price to book value multiple of 1.42 is much lower than the Zacks S&P 500 composite’s reading of 4. Given the growth prospects and undervaluation, this space offers attractive investment opportunities.
Here we focus on two P&C insurers, namely Chubb Limited CB and The Travelers Companies, Inc. TRV
While Chubb provides insurance and reinsurance products worldwide, Travelers offers a range of commercial and personal property and casualty insurance products as well as services to businesses, government units, associations and individuals in the United states and internationally. Both these stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Factors Driving the Industry
After suffering a soft pricing market for 19 consecutive quarters, insurers started to raise prices from the fourth quarter of 2018. In the first quarter of 2019, in personal lines insurance, homeowners, automobile and personal articles saw rate increase of 2%, 2.5% and 1%, respectively. In Commercial, most of the lines saw premium rate increase of 2%, while Commercial Auto saw a 7% rate increase.
In the rest of 2019, most of the commercial insurance lines should witness rate increase. This should help them sustain underwriting profitability despite claims stemming from catastrophes. Also, occurrence of natural disasters might lead to an accelerated rate of policy renewals and more new policy writings driving premiums higher.
Though the Fed had announced its intention of not raising interest rate in 2019 citing economic slowdown, a better rate environment than before should support investment results. The interest rate currently stands at 2.50%, up from the near zero level at the time of the financial crisis in 2008.
A sturdy capital level widens scope for more capital deployment to pursue growth initiatives as well as reward shareholders via dividend hikes, special dividends and share buybacks.
Increasing adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain and cloud computing should help insurers control costs.
Let’s now see how these P&C insurers fared in terms of some of the key metrics.
Travelers has outperformed both Chubb and the industry quarter to date. While shares of Travelers have gained 9.6%, Chubb has gained 5.7%.
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 1.42, Chubb is undervalued with a reading of 1.3 while Travelers shares are expensive with a P/B ratio of 1.62.
Both Chubb and Travelers have higher debt-to-equity ratio than the industry average of 26.2. However, Chubb with a reading of 26.7 betters Travelers’ leverage ratio of 28.9. Therefore, Chubb has a visible edge over Travelers on this front.
Return on Equity (ROE)
Travelers with a return on equity of 10.9% exceeded the industry average of 7.1% as well as Chubb’s ROE of 8.8%.
Travelers dividend yield is 2.2%, outperforming the industry average of 0.4% and Chubb’s yield of nearly 2%.
Combined ratio for Chubb is 89.2, above Travelers’ reading of 98.1. Chubb beats Travelers in this round.
Earnings Surprise History
Chubb’s earnings surpassed the Zacks Consensus Estimate in the last four quarters with the average being 3.00%. Travelers outpaced expectations in three of the trailing four quarters but delivered average four-quarter negative surprise of 0.25%.
Earnings Estimate Revisions and Growth Projections
Chubb’s 2019 earnings estimates have moved up by a cent in the past 30 days. The bottom line is estimated to increase 11.7% and 6.8% year over year in 2019 and 2020, respectively.
Travelers did not witness any estimate revisions in the said time frame. The bottom line is estimated to rally 24.3% and 6.3% year over year in 2019 and 2020, respectively.
The expected long-term earnings growth rate for Chubb is 10%, slightly better than Travelers’ 9.9% reading.
While Chubb scores better in terms of valuation, leverage, combined ratio, earnings estimate revisions, growth projection and earnings surprise history, Travelers fares better in terms of price performance, dividend yield and return on equity. Chubb is thus a more viable investment option than Travelers at present.
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