First American Financial Corporation FAF has been grapplingwith escalating costs and lower net investment income. These, in turn, have been weighing on the company’s overall results.
Shares of this Zacks Rank #3 (Hold) property and casualty (P&C) insurer have lost 12.3% in the past six months compared with the industry’s decline of 9.9%.
The Zacks Consensus Estimate for 2020 earnings is pegged at $3.58 per share, indicating a decline of 37.9% from the year-ago reported figure. The stock has also seen the Zacks Consensus Estimate for current-year earnings being revised downward by 2.8% over the past 60 days.
What’s Behind the Drop?
The P&C insurer continues to suffer from increased costs, primarily on account ofhigher personnel costs, premiums retained by agents, operating expenses, premium taxes and interests. Such costs tend to put pressure on the company’s margin expansion. Notably, in first-quarter 2020, net margin contracted 90 basis points sequentially.
Net investment income —an important driver of First American’s top line— has declined in first-quarter 2020. Further, the prevailing low-interest-rate environment is likely to keep investment yields under pressure. Moreover, equity market fluctuations have been weighing on the company’s overall investment income. Given the present financial market volatility due to the COVID-19 pandemic, First American expects a rise in its claims. Consequently, the company has decided to maintain the loss rate at 5%, up from the loss rate of 4% in fourth-quarter 2019.
In spite of purchase orders remaining strong at the onset of 2020, the same has fallen sharply in the mid of March. The company’s open purchase orders are expected to witness year-over-year decline of 45% in second-quarter 2020. Its commercial business is likely to be impacted due to the present market volatility. Consequently, revenues from the company’s commercial business are estimated to decrease 50% year over year in the second quarter.
Moreover, the P&C insurer’s debt levels have increased in first-quarter 2020. As of Mar 31, 2020, its total debt to total capital of 16.2% is higher than the prior-quarter figure of 14.1%. The P&C insurer’s interest coverage ratio of 18.4 compares unfavorably with the prior-quarter figure of 19.9, which implies that its earnings are not sufficient to cover interest obligations.
We believe that such potential headwinds are likely to dent growth prospects, going forward.
Stocks to Consider
Some better-ranked stocks in the insurance space are Amerisafe, Inc. AMSF, Brighthouse Financial, Inc. BHF and Kemper Corporation KMPR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Amerisafe is a specialty provider of workers’ compensation insurance, which markets and underwrites its insurance through subsidiaries. It beat estimates in each of the trailing four quarters, the average positive surprise being 50.67%.
Brighthouse Financial is a provider of annuity and life insurance products in the United States through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners. It beat estimates in each of the trailing four quarters, the average positive surprise being 14.38%.
Kemper specializes in property and casualty insurance, life and health insurance products for individuals, families, and small businesses. It beat estimates in each of the trailing four quarters, the average positive surprise being 16.25%.
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