The Zacks Property and Casualty Insurance industry has been gaining momentum on the back of improved pricing, increased technology advancements, exposure growth, underwriting profitability, favorable reserve development, demand for insurance products, and global expansion as well as impressive solvency level. Though the COVID-19 pandemic has put substantial pressure on the global economy and insurance industry last year, the industry is returning to normal with the rollout of vaccination and economic growth gaining traction.
The industry has gained 16.9% year to date compared with the Finance sector’s increase of 20.5% and the Zacks S&P 500 composite’s rally of 21.7%.
Image Source: Zacks Investment Research
However, the insurance industry remains exposed to catastrophe loss stemming from natural disasters, man-made catastrophes, and weather-related events. Such losses pose an inherent risk to the P&C insurance business, inducing volatility in its underwriting results.
The National Oceanic and Atmospheric Administration (NOAA) has predicted an above-normal Atlantic hurricane season for 2021. NOAA projects 13 to 20 named storms for 2021, out of which 6 to 10 could become hurricanes.
Catastrophe risk modeling specialist Karen Clark & Company (KCC) estimates the insurance and reinsurance industry loss from Hurricane Ida to be around $18 billion.
Nonetheless, improved pricing, prudent underwriting, and favorable reserve development will likely help maintain underwriting profitability.
Per the Global Insurance Market Index, global commercial insurance prices increased 15% in the second quarter of 2021, which marked the 15th consecutive quarter of rate increases in the global commercial insurance market.
The industry players are well-poised for growth on the back of higher new business premiums, growth in the line of business, increase in agency renewal written premiums, improving return on equity and non-cat property losses, and expanding international business. An expanded distribution, operational strength, higher retention, strong renewal, price increases, appointment of retail agents, and a solid balance sheet are likely to retain the momentum in the long run. Per a report published by WATERSTREET, Deloitte expects the global P&C insurance industry to grow 3% in 2021.
A low-rate environment continues to concern insurers as it weighs on investment income. Fed officials expect to start raising interest rates in 2023. Nevertheless, a larger invested base, directing funds to alternative investments like private equity, hedge funds, and real estate should provide some relief.
In a bid to improve operational efficiency and limit costs, insurers are making substantial investments in technology like blockchain, AI, advanced analytics, telematics, cloud computing, and robotic process automation. Increased digitization will help in faster claims processing. Per a WNS report, global spending on technology is estimated to increase 48% on a compound annual growth basis to $1.4 billion by 2021.
Here we focus on two property and casualty insurers, namely Arch Capital Group Ltd. ACGL and W.R. Berkley Corporation WRB. Arch Capital provides a wide range of products and services, which include primary and excess casualty coverages, professional indemnity, workers compensation, and umbrella liability. W.R. Berkley is one of the nation’s largest commercial lines property casualty insurance providers. Both the companies carry a Zacks Rank #2 (Buy) and have a respective market capitalization of $15.8 billion and $13.2 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s now see how these P&C insurers have fared in terms of some of the key metrics.
Earnings Surprise History
A stock’s earnings surprise track record helps investors get an idea about its performance in the previous quarters.
W.R. Berkley outpaced expectations in each of the four trailing quarters, delivering an earnings surprise of 16.51%, on average. Arch Capital came up with a four-quarter average earnings surprise of 14.28%. W.R. Berkley has an edge over Arch Capital here.
In the year-to-date period, Arch Capital and W.R. Berkley have gained 10.8% and 11.7%, respectively. This indicates that W.R. Berkley has an edge over Arch Capital on this front.
Return on Equity
Return on equity is a profitability measure. Hence, a higher ROE reflects the company’s efficiency in using its shareholders’ funds and is preferred by all equity investors.
W.R. Berkley’s ROE of 11.2% compares favorably with Arch Capital’s ROE of 7.8%.
Price-to-book value is one of the multiples used for valuing insurance brokers. Compared with the industry’s trailing-12-month P/B ratio of 1.28, Arch Capital and W.R. Berkley have a reading of 1.16 and 2, respectively. It is thus clear that Arch Capital’s valuation is better than W.R. Berkley’s.
Earnings growth along with stock price gains is often indicative of a company’s strong prospects.
The Zacks Consensus Estimate for Arch Capital’s 2021 earnings implies a 144.1% rise from the year-ago reported figure while that of W.R. Berkley suggests an increase of 94.4% from the prior-year reported number. Therefore, Arch Capital is at an advantage on this front.
Both companies have a higher debt-to-capital ratio than the industry average of 19.5. However, Arch Capital’s leverage ratio of 20.2 betters W.R. Berkley’s ratio of 30.7. Therefore, Arch Capital is at an advantage over W.R. Berkley on this front.
Arch Capital’s combined ratio was 86.2% in the first half of 2021, whereas that of W.R. Berkley was 89.9% in the said time frame. Thus, the combined ratio of Arch Capital betters than that of W.R. Berkley.
For 2021, the Zacks Consensus Estimate for Arch Capital has moved 2.5% north to $3.32 in the past 30 days while the same for W.R. Berkley has been revised 4.7% upward to $4.44. Therefore, W.R. Berkley is at an advantage over Arch Capital on this front.
VGM Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, best growth, and most promising momentum. Arch Capital has a VGM Score of A while W.R. Berkley has a VGM Score of C. Arch Capital thus is better placed.
Our comparative analysis shows that Arch Capital is better-positioned than W.R. Berkley with respect to VGM Score, growth projection, valuation, combined ratio, and leverage. Meanwhile, W.R. Berkley scores higher in terms of return on equity, price performance, estimate revision, and earnings surprise. As the scale is slightly tilted toward Arch Capital, the stock discernibly makes a more promising investment proposition.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.