The property and casualty (P&C) insurance industry has lost 1.1% quarter to date against the Zacks S&P 500 composite’s increase of 1.1%. The Finance sector has also declined 0.9% in the said time frame. While cat losses weigh on underwriting profitability, low interest rate affects investment results of insurers. Hurricane Dorian and two rate cuts by the Federal Reserve in the ongoing quarter are expected to weigh on the performance of P&C insurers. However, better pricing, strong capital level, improved product and services and adoption of technology offered some cushion.
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The industry is ranked #34 and is housed within the top 13% 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 1.4 is much lower than the Zacks S&P 500 composite’s reading of 4.03. Given the growth prospects and undervaluation, this space offers attractive investment opportunities.
Here we focus on two P&C insurers, namely CNA Financial Corporation CNA and W. R. Berkley Corporation WRB.
While CNA Financial provides commercial property and casualty insurance products primarily in the United States, W. R. Berkley operates as a commercial lines writer in the United States and internationally. Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Industry Backdrop
Risk modeling and analytics firm RMS expects insured losses to range between $3.5 billion and $6.5 billion while catastrophe modeler Karen Clark & Co. estimates insured losses in the United States and Caribbean to be around $ 5 billion, per media release.
Nonetheless, property and casualty insurers are increasingly taking reinsurance covers to shield their profits.
Given frequent occurrences of catastrophes, insurers benefit from better pricing in most lines of business. Per Willis Towers Watson Insurance Marketplace Realities, 14 commercial lines should see rate increase while two are expected to see rate decline. Nine lines of business are predicted to witness small increases/decreases or flat rates. A rise in premium rates should lead to top-line growth.
This quarter saw two rate cuts by 25 basis points each by the Fed, citing muted inflation pressure and geopolitical tension. The rate now stands in the range of 1.75-2%. New projections indicate that the Fed might lower rates again. Insurers are likely to feel the pinch of a lowered rate though a higher invested asset base should offer some respite.
The property and casualty insurance industry boasts good policy holders’ surplus. A sturdy capital level widens scope for capital deployment to pursue growth initiatives as well as reward shareholders.
Increasing adoption of technologies should help insurers control costs. The industry has also witnessed the emergence of Insurtech.
Let’s now see how these P&C insurers are poised in terms of some of the key metrics.
Price Performance
W. R. Berkley has outperformed both CNA Financial and the industry quarter to date. While shares of W. R. Berkley have rallied 10.2%, CNA Financial has gained 4.1%.
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Valuation
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 1.4, CNA Financial is undervalued with a reading of 1.1 while W. R. Berkley shares are expensive with a P/B ratio of 2.21.
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Debt-to-Equity
CNA Financial has lower debt-to-equity ratio of 22.2 compared with the industry average of 25.9 and W. R. Berkley’s reading of 46.2. Therefore, CNA Financial has a clear edge over W. R. Berkley on this front.
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Interest Coverage Ratio
Interest coverage ratio of both CNA Financial and W. R. Berkley is lower than the industry average of 10.7. However, with a reading of 8.7 CNA Financial betters W. R. Berkley’s interest coverage ratio of 6.4. Interest coverage ratio is the measure of a company's ability to service its debt payments. CNA Financial fares better than W. R. Berkley in this round.
Return on Equity (ROE)
W. R. Berkley with a return on equity of 10.6% exceeded the industry average of 6.8% as well as CNA Financial’s ROE of 7.8%.
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Dividend Yield
CNA Financial’s dividend yield is 2.9%, better than the industry average of 0.4% and W. R. Berkley’s yield of 0.6%. Thus, CNA Financial has a clear edge on this front.
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Combined Ratio
Combined ratio for W.R. Berkley is 93.5, better than CNA Financial’s reading of 95.7. W.R. Berkley beats CNA Financial in this round. Combined ratio is a measure of insurers’ profitability. Lower the combined ratio, the better.
Earnings Surprise History
W. R. Berkley earnings surpassed the Zacks Consensus Estimate in the last four quarters while CNA Financial outpaced expectations in the last three quarters.
Earnings Estimate Revisions and Growth Projections
CNA Financial’s 2019 earnings estimates have moved up nearly 2% in the past 60 days. The bottom line is estimated to increase 4.8% in 2019. The long-term earnings growth rate is pegged at 5%.
W. R. Berkley’s 2019 earnings estimates have moved up 1.4% in the past 60 days. The bottom line is estimated to increase 7.1% in 2019. The long-term earnings growth rate is pegged at 9%.
To Conclude
While CNA Financial has an edge in terms of valuation, leverage, interest coverage ratio, dividend yield and earnings estimate revisions and growth projections, W. R. Berkley scores better in terms of price performance, return on equity, combined ratio and earnings surprise history. CNA Financial is thus a more viable investment option than W. R. Berkley at present.
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