The insurance industry witnessed a change of fortunes in the first quarter of 2018 driven by better-than-expected performance mainly fueled by improving interest rates and economy, significantly lower catastrophe loss along with noteworthy tax reform effective Jan 1, 2018. Consequently, the industry is anticipated to deliver better-than-expected results and continue the momentum in the near term as well.
Per a report by Fitch Ratings, the insurance industry is expected to regain its substantial underwriting profitability in 2018, albeit at a slow pace. Moreover, combined ratios are likely to improve and might come close to breakeven. Thus, insurance players can expect a better year in terms of catastrophe losses compared with the tumultuous journey in 2017.
Notably, the interest rate hike in March, which also marks the sixth increase post recession, reflects stability in the economy. Improving rate environment will aid investment income which is an important component of insurers' revenues. Further, following the Federal Reserve's indication of increasing interest rates thrice in 2018 with the possibility of a fourth hike this year plus two more in 2019, we expect investment results to continue to show improvement.
Apart from the rising interest rate environment, the property and casualty (P&C) insurers will also benefit from a broader invested asset base and alternative asset classes.
Other factors like lower tax incidence, growing GDP and an improving employment scenario are likely to aid the insurers' performance, going forward.
The Property and Casualty Insurance industry is ranked at #184 (among bottom 31% of the Zacks Industry Rank
for 267 industries) and it has underperformed the S&P 500 index's gain of 1.7% year to date, registering a decrease of 0.1%.
Here we focus on two P&C insurers. While Markel Corporation MKL markets and underwrites specialty insurance products in the United States, the U.K., Canada, and internationally, XL Group Ltd. XL operates as an insurance and reinsurance company globally. While Markel Corporation has a market capitalization of $15.9 billion, XL Group's metric records $14.4 billion.
It will be interesting to note which scores better in terms of fundamentals.
Investors interested in the space can take a look at NMI Holdings, Inc. NMIH and RLI Corp. RLI , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
In the first quarter, Markel's bottom-line and top-line beat the Zacks Consensus Estimate, registering year-over-year improvement for both the metrics. However, XL Group missed the Zacks Consensus Estimates in terms of both the aforementioned metrics, even though both earnings and revenues improved on a year-over year basis.
Earnings Surprise History
As far as the companies' surprise history goes, Markel has surpassed the Zacks Consensus Estimate in two of the last four quarters with an average beat of 15.54%, whereas XL Group has missed the consensus mark in three out of the trailing four quarters with a negative surprise of 4.20%.
Hence, Markel outshines XL Group in this round.
Earnings Estimate Revisions and Growth Projections
Markel's 2018 estimates have 10.8% north and 1.9% up for 2019 in the last 30 days. Meanwhile, the Zacks Consensus Estimate for XL Group's both current-year and 2019 earnings have been revised downward by 0.3%.
For XL Group, the consensus mark for 2018 earnings per share is estimated to grow 282.1% on 4.6% revenue improvement. For 2019, the company's bottom line is expected to increase8.1% on 4.8% top-line rise.
For Markel the Zacks Consensus Estimate for earnings per share in 2018 is projected to grow by a whopping 962.9% rallying on 12.6% revenue increase. For 2019, the bottom line is predicted to climb 1.2% on 6.3% revenue improvement.
In this case too, Markel gains advantage over XL Group.
Combined ratio, the percentage of premiums paid out as claims and expenses, determines the underwriting profitability of an insurer.
Markel's combined ratio was 90% in the first-quarter 2018 while XL Group's came in at 95.3%. Markel wins this round.
Both companies have higher debt-to-equity as compared with the industry average of 28.39%. However, XL Group with a leverage ratio of 28.84 has a slight edge over Markel's ratio of 32.7.
Return on Equity
Both Markel and XL Group's respective return on equity of 1.47% and (3.75%) is substantially lower than the industry average of 5.25%. Therefore, between Markel and XL Group, the former is comparatively better positioned.
Both Markel and XL Group have outpaced the industry year to date. While Markel's shares have gained 0.9%, XL Group's stock has rallied 58.5%. XL Group emerges a clear winner here.
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 1.43, Markel is overvalued with a reading of 1.71. Meanwhile, XL Group is much cheaper with a trailing 12-month P/B multiple of 1.27. This round again goes to XL Group as its shares are cheaper than Markel's.
In this case, XL Group trumps Markel as the latter has not paid dividends since its inception. XL Group's dividend yield was 1.58% in a year that outshines the industry's average of 0.48%. Consequently, XL Group does not have any competition in this respect and emerges as the clear winner.
While Markel sports a Zacks Rank #1, XL Group carries a Zacks Rank of 5 (Strong Sell).
Markel is positioned better than XL Group on the basis of rank, return on equity, combined ratio, Q1 scorecard and earnings surprise history as well as earnings estimate revisions and growth projections. However, considering parameters like price performance, valuation, debt-to-equity ratio and dividend yield, XL Group seems better off than Markel. Per our comparative analysis, Markel seems a more lucrative investment option than XL Group.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report RLI Corp. (RLI): Free Stock Analysis Report XL Group Ltd. (XL): Free Stock Analysis Report Markel Corporation (MKL): Free Stock Analysis Report NMI Holdings Inc (NMIH): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research