The property and casualty (P&C) insurance industry witnessed the adverse impact of Hurricane Dorian and lower interest rate in the ongoing quarter. However, better pricing, strong capital level, improved product and services and adoption of technology offered some cushion.
The industry has lost 1.2% quarter to date against the Zacks S&P 500 composite’s increase of 1.1%. The Finance sector has also declined 1.2% in the said time frame. The property and casualty insurance industry is ranked #57 and housed within the top 22% 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 1.39 is much lower than the Zacks S&P 500 composite’s reading of 4.02. Given the growth prospects and undervaluation, this space offers attractive investment opportunities.
Here we focus on two P&C insurers, namely Alleghany Corporation Y and Cincinnati Financial Corporation CINF
While Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally, Cincinnati Financial provides property casualty insurance products in the United States. Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Driving the Industry
The insurance industry is already into the hurricane season with Hurricane Dorian making landfall in the Bahamas. Per media reports, analysts at UBS Group AG estimate Hurricane Dorian to cause about $25 billion in losses in Bahamas. AccuWeather estimates the total damage and economic loss stemming from Hurricane Dorian to be in the range of $8-10 billion.
Nonetheless, property and casualty insurers are increasingly taking reinsurance covers to safeguard their profits.
Also, after suffering a soft pricing market for 19 consecutive quarters, insurers started raising prices from the fourth quarter of 2018. Improved pricing helps write more premiums to address huge claims arising due to calamities. Per Willis Towers Watson plc’s Commercial Lines Insurance Pricing Survey in 2019, most of the commercial insurance lines should witness rate increase.
Also, occurrence of natural disasters might lead to an accelerated rate of policy renewals and new policy writings, thus driving premiums higher.
The Fed cut interest rate by 25 basis points at its July FOMC meeting and the rate currently stands at 2.25%. Given slow employment growth rate, economic slowdown and trade war-related uncertainties, the market expects another 25 basis points rate cut. Insurers, being one of the beneficiaries of an improved rate environment, are likely to feel the pinch of a lowered rate though a higher invested asset base should offer some respite.
A sturdy capital level widens scope for 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 see how these P&C insurers fared in terms of some of the key metrics.
Alleghany has outperformed both Cincinnati Financial and the industry quarter to date. While shares of Alleghany have rallied 12.4%, Cincinnati Financial has gained 7.5%.
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 1.39, Alleghany is undervalued with a reading of 1.29 while Cincinnati Financial shares are expensive with a P/B ratio of 1.99.
Both Alleghany and Cincinnati Financial have lower debt-to-equity ratio than the industry average of 25.9. However, Cincinnati Financial with a reading of 9.7 betters Alleghany’s leverage ratio of 19.7. Therefore, Cincinnati Financial has a clear edge over Alleghany on this front.
Interest Coverage Ratio
Cincinnati Financial’s interest coverage ratio of 28.1 is better the industry average of 10.7 and Alleghany’s reading of 4.3. Interest coverage ratio is the measure of a company's ability to service its debt payments. Cincinnati Financial fares better than Alleghany in this round.
Return on Equity (ROE)
Cincinnati Financial with a return on equity of 7.1% exceeded the industry average of 6.8% as well as Alleghany’s ROE of 2.9%.
Cincinnati Financial’s dividend yield is 2%, outperforming the industry average of 0.4%. Alleghany does not pay dividend. Thus, Cincinnati Financial has a clear edge on this front.
Alleghany’s combined ratio is 92.9, better than Cincinnati Financial’s reading of 96.5. Alleghany’s beats Cincinnati Financial in this round.
Earnings Surprise History
Alleghany’s earnings surpassed the Zacks Consensus Estimate in three of the last four quarters with the average being negative 13.57%. Cincinnati Financial outpaced expectations in the trailing four quarters with the surprise being 19.75%.
Earnings Estimate Revisions and Growth Projections
Alleghany’s 2019 earnings estimates have moved up 13.1% in the past 60 days. The bottom line is estimated to increase 161.9% and 10.7% year over year in 2019 and 2020, respectively.
Cincinnati Financial’s 2019 earnings estimates have moved up 5.6% in the past 60 days. The bottom line is estimated to increase 11.9% in 2019 but decline 0.7% in 2020.
While Cincinnati Financial has an edge in terms of leverage, interest coverage ratio, ROE, dividend yield, earnings surprise history, Alleghany fares better in terms of price performance, valuation, combined ratio, and estimate revisions and growth projections. Cincinnati Financial is thus a more viable investment option than Alleghany at present.
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