CNA or AFG: Which Property & Casualty Insurer Has an Edge?
The Zacks Property and Casualty (P&C) Insurance industry has been benefiting from better pricing, prudent underwriting, increased exposure, an improving rate environment and a solid capital position. With the ongoing economic expansion, insurers remain well-poised for growth. However, catastrophe losses might have weighed on P&C insurers.
The industry has risen 20.2% in the past year, outperforming the Zacks S&P 500 composite’s growth of 9.8% and the Finance sector’s 1.9% increase.
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Here we focus on two property and casualty insurers, namely CNA Financial Corporation CNA and American Financial Group, Inc. AFG.
CNA Financial, with a market capitalization of $10.42 billion, provides commercial property and casualty insurance products in the United States and internationally. American Financial, with a market capitalization of $9.48 billion, is an insurance holding company. It provides specialty property and casualty insurance products in the United States. CNA and AFG carry a Zacks Rank #3 (Hold) each at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Global commercial insurance prices rose 3% in the second quarter of 2023, per Marsh Global Insurance Market Index. This marked the 23rd consecutive quarter of composite price increase. Improvement in pricing drives premiums and claims payment.
Price hikes, operational strength, higher retention, strong renewal and the appointment of retail agents should help write higher premiums.
The P&C insurance industry remains exposed to catastrophe loss stemming from natural disasters, which drag down underwriting profit. Colorado State University predicted that 2023 hurricane activity will be about 130% of the average season. The team also predicted 18 named storms in 2023. In the first half of 2023, Aon had estimated a global economic loss of $194 billion from natural disasters, which was the fifth highest on record. Per Aon, in the first half of 2023, global insured losses from natural disaster events were 46%, which was above the 21st-century average.
Exposure growth, improved pricing, prudent underwriting, favorable reserve development and a sturdy capital position will help absorb catastrophe losses. Also, frequent occurrences of natural disasters should accelerate the policy renewal rate.
With four rate hikes already in 2023, investment income is likely to have improved, as insurers are beneficiaries of a rising rate environment. The Fed had raised its key interest rate by 0.25% and reached a target range of 5.25% to 5.5%, which marked the highest level in 22 years. An improving rate environment is a boon for insurers, especially long-tail insurers. Also, investment income is an important component of insurers’ top line.
While a solid policyholders’ surplus will help the P&C insurance industry absorb losses, a sturdy capital level continues to aid the P&C insurers in pursuing strategic mergers and acquisitions, investing in growth initiatives, engaging in share buybacks and increasing dividends or paying out special dividends.
Players are investing heavily in technology in a bid to drive efficiency, enhance cybersecurity, upgrade policy administration and claims systems and expand automation capabilities across their organizations.
Let's delve deeper into specific parameters to ascertain which P&C insurer is better positioned at the moment.
Price Performance
CNA Financial has lost 4% in the past year against the industry’s growth of 20.2%. Shares of American Financial have declined 15.3% in the said time frame.
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Return on Equity (ROE)
American Financial, with a ROE of 22.5%, exceeds CNA Financial’s ROE of 13% and the industry average of 6.7%.
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Valuation
The price-to-book value is the best multiple used for valuing insurers. Compared with American Financial’s P/B ratio of 2.38, CNA Financial is cheaper, with a reading of 1.19. The P&C insurance industry’s P/B ratio is 1.41.
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Dividend Yield
CNA Financial’s dividend yield of 4.3% is better than the American Financial’s dividend yield of 2.2%. Thus, CNA has an advantage over AFG on this front.
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Long-Term Debt-to-Capital
AFG’s long-term debt-to-capital ratio of 26.9 is higher than the industry average of 1.2 and CNA’s reading of 21.4.
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Earnings Surprise History
American Financial has a solid record of beating earnings estimates in six of the last seven quarters, missing once. CNA Financial beat earnings estimates in four of the last seven quarters and missed on three occasions.
Hence, AFG has an edge in this regard over CNA.
Growth Projection
The Zacks Consensus Estimate for 2023 earnings indicates 12.7% growth from the year-ago reported figure for CNA Financial, while the same for American Financial indicates a decline of 8.5%.
Earnings Estimates
For 2023, the Zacks Consensus Estimate for CNA has moved 0.6% north to $4.33 in the past 60 days, while the same for AFG has been revised 7.6% downward to $10.64. Therefore, CNA is in an advantageous position over AFG on this front.
To Conclude
Our comparative analysis shows that CNA Financial is better positioned than American Financial with respect to price, valuation, dividend yield, leverage, growth projection and earnings estimates. Meanwhile, American Financial scores higher in terms of return on equity and earnings surprise history. With the scale majorly tilted toward CNA Financial, the stock appears to be better poised.
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CNA Financial Corporation (CNA) : Free Stock Analysis Report
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