Profit from This Top-Ranked Industry – Investment Ideas
Insurance may not be the most exciting industry in the business world. But right now it is one of the hottest based on earnings momentum.
According to the Zacks Industry Rank, the ‘Property & Casualty Insurance’ industry currently ranks 13th out of 265 industries. That puts it in the top 5% of all industries. It is also the highest-ranked among industries with at least 13 companies in it.
This means that analysts have been revising their estimates significantly higher for a number of property and casualty insurers. That’s a sign of good things to come for investors.
A Turnaround Story
An insurance company essentially makes money in two ways: by collecting enough premiums to cover its claims, and by earning investment returns (“the float”). But the past few years have been very challenging for the property and casualty insurance industry.
First, the ratio of claims paid to premiums collected (the “loss ratio”) has marched significantly higher throughout the industry. This is due not only to a number of large scale catastrophes but also to weak premium growth thanks to a soft economy. Secondly, record low interest rates have led to anemic investment income on the float. This has led to depressed valuations throughout the industry.
But things are starting to improve for P&C insurers. After years of marching higher, loss ratios have been improving thanks to improved underwriting and a relatively low number of catastrophes this year (it was a very quiet hurricane season).
And many analysts expect loss ratios to continue improving over the next few years as premiums continue to rise at a healthy clip. For instance, according to Dallas-based electronic insurance exchange MarketScout, commercial property and casualty insurance rates rose an average of 4% year-over-year in November.
While The Taper Hurt Insurers?
While rising premiums will undoubtedly help insurers, the overall impact of a rising long-term interest environment is still unclear. On one hand, rising interest rates could hurt book values as the value of bonds held in the investment portfolio decline. But insurers with a short-duration bond portfolio should be relatively unharmed since short-term interest rates are expected to remain low for quite some time. Plus, higher interest rates could lead to higher future interest income for insurers.
The impact of rising rates will vary on a company-by-company basis that depends on the nature of its liabilities and how skilled its portfolio manager is at forecasting interest rates.
Valuations Still Attractive
Investors in property and casualty insurers have had a good year. The KBW Property & Casualty Index is up +33% year-to-date, outpacing the +27% return for the S&P 500. But due to depressed valuations at the start of the year and rising earnings estimates, valuations still look attractive for many within the industry.
The price to tangible book value ratio for the entire P&C industry is currently just 1.8, for instance. That’s well below its 10-year median of 2.4. And the price to cash flow ratio of 11.9 is also well below its 10-year median of 13.1.
4 Attractive Property & Casualty Insurers
While many property and casualty insurers look attractive, here are my top 4 companies based on earnings momentum and valuation:
Montpelier Re Holdings (MRH)
Zacks Rank: 1 (Strong Buy)
Price/Tangible Book: 1.0
Montpelier Re Holdings provides global property and casualty reinsurance and insurance products, specializing in property and short-tail lines.
PartnerRe Ltd. (PRE)
Zacks Rank: 1 (Strong Buy)
Price/Tangible Book: 0.9
PartnerRe is an international reinsurer with total assets of more than $23 billion.
Endurance Specialty Holdings (ENH)
Zacks Rank: 1 (Strong Buy)
Price/Tangible Book: 0.9
Endurance Specialty Holdings provides property and casualty insurance and reinsurance with primary offices in Bermuda, London, New York, Zurich and Singapore.
CNA Financial (CNA)
Zacks Rank: 1 (Strong Buy)
Price/Tangible Book: 0.9
CNA Financial is the 8th largest U.S. commercial insurer and the 13th largest U.S. property & casualty insurer. It is headquartered in Chicago.
The Bottom Line
With improving industry trends, excellent earnings momentum and attractive valuation, these 4 property and casualty insurers are well-positioned to move higher.
Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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CNA FINL CORP (CNA): Free Stock Analysis Report
ENDURANCE SPLTY (ENH): Free Stock Analysis Report
MONTPELIER RE (MRH): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
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