The insurance industry seems well placed at present. Favorable factors like benign catastrophe environment, improving rate environment and economic progression boost insurers for growth.
Underwriting results, the major indicator of profitability for any insurer, are expected to improve on the back of a benign catastrophe environment. Due to a string of cat events such as the unprecedented hurricane activity and the California wildfires, the year 2017 emerged costliest in terms of catastrophe loss, weighing on the underwriting profitability.
As a result of devastating nature’s fury, insurers braved price hikes that had remained flat for quite a while.
Within the insurance space, the property and casualty insurers are among the major beneficiaries of an improving rate environment. The Fed had promised to make three interest rate raises in 2018 and 2019, reflects the regulatory body’s confidence in the bettering U.S. economy. Last year, the Fed had implemented three rate hikes with the metric being now pegged at 1.5%.
An increased rate is expected to positively impact the net investment income, a major component of an insurer’s top line. A broader invested asset base and alternative asset classes are other upsides.
Also, President Donald Trump’s tax reform policy, an overhaul of tax code after 31 years, lowers the corporate tax burden. Notably, the tax rate lowered to 20% from 35% will likely act add an impetus to the industry players.
Though the Property and Casualty Insurance industry is ranked at #138 (lies at the bottom half of the Zacks Industry Rank for 252 plus industries), it has outperformed the S&P 500 index’s gain of 2.4% year to date, registering a 2.8% rise.
Here we focus on two property and casualty insurers. While CNA Financial Corp. CNA offers commercial P&C insurance products, mainly across the United States, Cincinnati Financial Corp. CINF markets property and casualty insurance as its main business. While CNA Financial has a market capitalization of $14.2 billion, Cincinnati Financial’s metric records $12.4 billion.
Both stocks carry a Zacks Rank #3 (Hold). It will be interesting to note which scores better in terms of fundamentals.
Two better-ranked stocks from the same industry are Alleghany Corp. Y and American Financial Group, Inc. AFG , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1Rank stocks here .
CNA Financial has outpaced the industry with its shares rallying 20.3% in a year’s time while Cincinnati Financial has lagged the same with shares having gained only 4.1%. Here, CNA Financial emerges a clear winner.
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 1.64, Cincinnati Financial is underpriced with a reading of 1.51. Meanwhile, CNA Financial is much cheaper with a trailing 12-month P/B multiple of 1.16. This round again goes to CNA Financial as its shares are cheaper than Cincinnati Financial’s.
Both companies have lower debt-to-equity as compared to the industry average of 32.29%. Cincinnati Financial with a leverage ratio of 10.32 has a visible edge over CNA Financial with the same of 23.34.
Return on Equity
Both CNA Financial and Cincinnati Financial’s respective return on equity of 7.64% and 5.99% exceeded the industry average of 5.4%. With a higher mark, CNA Financial one more wins this round.
Cincinnati Financial’s dividend yield was 2.64% in a year whereas CNA Financial’s was 2.29%. Both have a dividend yield that outshines the industry’s average of 0.47%. Comparatively, Cincinnati Financial stays ahead of CNA Financial.
Notably, Cincinnati Financial has been increasing the yearly dividend for the past 58 years, a record matched by only eight other publicly-traded companies in the United States.
Combined ratio, the percentage of premiums paid out as claims and expenses, determines the underwriting profitability of an insurer.
CNA Financial’s combined ratio was 97.1 in 2017 while Cincinnati Financial’s is 97.5. CNA Financial wins this round too.
Earnings Surprise History
As far as the companies’ surprise history goes, both CNA Financial and Cincinnati Financial have surpassed the Zacks Consensus Estimate in the last four quarters with an average beat of 46.88% and 16.49%, respectively. CNA Financial has yet again got the better of Cincinnati Financial.
Earnings Estimate Revisions and Growth Projections
CNA Financial’s 2018 estimates have moved 7.2% north and 20.6% up for 2019 in the last 30 days. While the Zacks Consensus Estimate for Cincinnati Financial’s current-year earnings have been revised 2.4% downward but increased 5.5% for 2019 over the same time frame.
For CNA Financial, the consensus mark for 2018 earnings per share is estimated to grow 19.5% on 1.4% revenue improvement. For 2019, the company’s bottom line is expected to inch up 1.6% on 2.8% top-line rise. CNA Financial has a long-term expected earnings per share growth rate of 5%.
The Cincinnati Financial stock has seen the Zacks Consensus Estimate for earnings per share in 2018 being projected at a 20.4% rally on 4.1% revenue increase. For 2019, the bottom line is predicted to climb 5.3% on 4.2% revenue improvement.
Here too, CNA Financial gains advantage over Cincinnati Financial.
CNA Financial is positioned higher than Cincinnati Financial on the basis of price performance, valuation, return on equity, combined ratio, earnings surprise history and growth projections. Considering parameters like dividend yield and leverage ratio, Cincinnati Financial seems better off than CNA Financial. Per our comparative analysis, CNA Financial is thus a more attractive investment option than Cincinnati Financial.
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Cincinnati Financial Corporation (CINF): Free Stock Analysis Report
CNA Financial Corporation (CNA): Free Stock Analysis Report
Alleghany Corporation (Y): Free Stock Analysis Report
American Financial Group, Inc. (AFG): Free Stock Analysis Report
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