A buoyant economy — reflected by accelerated interest rate hikes, a growing gross domestic product (GDP), lower tax rate and more-than-decent underwriting performance — has given the property and casualty (P&C) insurers enough reasons to stay upbeat about the soon-to-be-reported quarter.
However, the fourth quarter of 2018 could not escape the onslaughts of catastrophic events (Hurricane Michael and California wildfires) and this will bear a considerable impact on the P&C insurers’ results in the yet-to-be-reported quarter. In November, catastrophe modeling firm Risk Management Solutions Inc. projected losses from the wildfires to be in the range of $9-$13 billion.
In comparison to 2017, which proved to be the costliest year in terms of catastrophe loss with the insurers’ underwriting profitability taking a major hit, so far this year, the P&C insurance industry has not faced a wrath to that extent/of that magnitude. Although insurers will bear the brunt of such catastrophic events through their quarterly performances, the same is not expected to create a huge dent in their underwriting capabilities.
With respect to pricing environment, after experiencing 19 back-to-back quarters of soft pricing market, insurers began to increase prices from the fourth quarter of 2017. Per excerpts from Insurance Marketplace Realities by Willis Towers Watson, property insurance rates in 2018 are estimated to rise 20-25% for catastrophe-exposed risks with recent losses.
Moreover, the insurers also built capital reserves owing to a not-so-active catastrophe in the past, which has been helping companies meet insurance claims. Also, the insurance industry boasts an all-time high capital level that will not only back the players to counter their near-term volatility and offset the impact of hostile occurrences but also sustain the industry’s growth momentum.
With respect to interest rates, the regulatory body has chosen an aggressive path of rate hikes signifying the economic strength. With an FOMC meeting around the corner, the investors’ interest is at its peak as a fourth interest rate increase is highly anticipated. In fact, the Central Bank has also hinted at a line-up of three more rate raises in 2019 and a couple of more in 2020.
This increase in interest rates has been a boon to insurers and we are hopeful that an improving rate environment will aid investment income, an important component of insurers’ revenues.
Several factors like a decrease in unemployment rate (estimated at 3.7% in 2018), better GDP (likely to grow 3.1% in 2018) and inflation (anticipated to remain slightly above the targeted 2% through 2020) represent a bullish economic outlook.
Hence, the aforementioned factors will play a crucial role in maintaining this optimistic sentiment for the insurers in the near future in comparison to the tumultuous journey suffered by the insurers in 2017.
The Property and Casualty Insurance industry is ranked at #181 (representing the bottom 30% of the Zacks Industry Rank for more than 250 industries) and has underperformed the Zacks S&P 500 Composite’s decrease of 0.8% year to date. While the industry has declined 1.3%.
Here we focus on two P&C insurers, namely First American Financial Corporation FAF and RenaissanceRe Holdings Ltd. RNR, both carrying a Zacks Rank #3 (Hold). While First American provides financial services, RenaissanceRe Holdings offers reinsurance and insurance coverage in the United States and internationally. While the former has a market capitalization of $5.1 billion, the latter’s metric records $5.5 billion.
It will be interesting to note which stock scores higher in terms of fundamentals.
Investors interested in the same space can also take a look at Mercury General Corporation MCY and National General Holdings Corp. NGHC, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While RenaissanceRe Holdings has outpaced the industry year to date, First American has noticeably underperformed the same. While shares of RenaissanceRe Holdings have gained 8.4%, First American stock fell 18.3%. Thus, RenaissanceRe Holdings emerges a winner here.
The price to book value metric is the best multiple used for valuing insurers. Compared with the P&C Industry’s P/B ratio of 1.35, RenaissanceRe Holdings is trading at a discount with a reading of 1.29. Meanwhile, First American is trading at a premium with a trailing 12-month P/B multiple of 1.39. This round clearly goes to RenaissanceRe Holdings as its shares are underpriced than that of First American.
Return on Equity
RenaissanceRe Holdings’ return on equity of 10.52% lies above the industry average of 6.60%. The same is, however, lower than First American’s 13.68%. Return on equity — a profitability measure — reflects how efficiently the company utilizes shareholders’ funds. Therefore, between RenaissanceRe Holdings and First American, the former is better-positioned.
Both RenaissanceRe Holdings and First American have a debt-to-equity, noticeably lower than the industry average of 25.86%. Hence, First American with a leverage ratio of 20% has a slight edge over RenaissanceRe Holdings’ 20.28% ratio.
Both RenaissanceRe Holdings and First American have higher dividend yields compared with the industry average of 0.47%. First American with 3.67% yield has a strong edge over RenaissanceRe Holdings’ 0.97% tally. Hence, First American is better off than RenaissanceRe Holdings on this front.
Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. First American with a favorable VGM Score of A has visible advantage over RenaissanceRe Holdings’ VGM Score of B.
Earnings Surprise History
As far as both companies’ surprise stories are concerned, First American and RenaissanceRe Holdings surpassed the Zacks Consensus Estimate in all the last four reported quarters, the average being 5.42% and 139.34%, respectively. RenaissanceRe Holdings convincingly overshadows First American in this round.
Earnings Estimate Revisions
First American’s 2018 and 2019 estimates have moved 0.9% and 4.2% south, respectively, over the past 60 days. Meanwhile, the Zacks Consensus Estimate for RenaissanceRe Holdings’ current-year and 2019 earnings has been revised 35.3% and 1.1% downward, respectively, in the same time period. Here, First American has an edge over RenaissanceRe Holdings.
For First American, the consensus mark for 2018 and 2019 earnings is estimated to rise 59.6% and 2.9%, respectively.
For RenaissanceRe Holdings, the consensus estimate for earnings in the current year is projected to skyrocket 205.6% while for 2019, the bottom line is predicted to improve 26.5%.
Moreover, First American’s long-term earnings growth rate is pegged at 11%, whereas the same for RenaissanceRe Holdings is envisioned to be 10%.
In this case, RenaissanceRe Holdings is better off than First American.
RenaissanceRe Holdings is more well-poised than First American on the basis of price performance, valuation, solid return on equity, stellar earnings surprise history and encouraging growth projections. While considering parameters like leverage ratio, an impressive dividend yield, earnings estimate revisions and the VGM Score, First American seems a wealthier option than RenaissanceRe Holdings as a stock. Our comparative analysis comprehensively shows that RenaissanceRe Holdings is a more rewarding investment pick than First American.
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RenaissanceRe Holdings Ltd. (RNR) : Free Stock Analysis Report
National General Holdings Corp (NGHC) : Free Stock Analysis Report
First American Financial Corporation (FAF) : Free Stock Analysis Report
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