Shares of The Hanover Insurance Group THG closed at $143.98 on Thursday, near its 52-week high of $144.10, after having gained 34.9% in a year. Shares outperformed the industry, the Finance sector as well as the Zacks S&P 500 composite index in the same time frame.
Continued strong performing Core Commercial and Specialty segments, stable retention, better pricing, strong market presence and a solid capital position poise this insurer well for long-term growth.
Hanover Insurance believes that it is well-positioned to achieve a long-term return on equity target of 14% or higher by 2026 on better rates and prudent cost management.
THG Outperforms Industry, Sector & S&P in a Year
Image Source: Zacks Investment Research
Optimistic Analyst Sentiment Instills Confidence in THG
Two of the three analysts covering the stock have raised estimates for 2024, and three out of four have raised the same for 2025 over the past 30 days. The consensus estimate for 2024 and 2025 has moved 2.4% and 1.1% north, respectively, in the past 30 days.
The Zacks Consensus Estimate for 2024 implies a 595.5% year-over-year increase, while the same for 2025 suggests a 24.8% increase.
Factors Favoring Hanover Insurance
Hanover Insurance is a leading carrier with a specialty focus on small to mid-sized clients. It looks to be a premier P&C franchise in the independent agency channel. Capitalizing on the opportunities the total addressable $78 billion market offers, the insurer nearly doubled written premiums in Specialty over the last 10 years using organic and inorganic means. It targets to deliver about 10% CAGR over the next five years and in the upper single digits in 2024.
THG intends to grow by focusing on pricing segmentation, rate increase and an emphasis on growth in target states, product lines and industry classes in the middle market. The company has gradually transformed into a more balanced and differentiated property and casualty franchise.
Prudent underwriting, data, analytic tools and technology have lowered coastal exposure and enhanced pricing for catastrophes, which in turn has built a diversified book of business for Hanover Insurance. The insurer’s claims strategy implementation should help it to record a 130-basis point reduction in the loss adjustment expense ratio by 2026 while generating $2 billion in premium growth by the same time.
High interest rates aid continued investment of operational cashflows, providing additional investment income. An interest rate cut is likely in the September FOMC, with chances of more later this year. This will limit the upside that an improving rate environment offers.
In sync with the accelerated digitalization going on in the insurance industry, THG continues to invest in technology to upgrade its front-end capabilities.
As part of wealth distribution to shareholders, Hanover Insurance has been hiking dividends for the last 17 years, apart from paying special dividends. Its dividend yield of 2.4% betters the industry average of 0.3%, making it an attractive pick for yield-seeking investors.
Expensive Valuation
Valuation remains expensive at the current level. It is currently trading at a price-to-book multiple of 2.03, higher than the industry average of 1.62.
It has a Value Score of A. This style score helps find the most attractive value stocks. Back-tested results have shown that stocks with a Value Score of A or B combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) are the most attractive value stocks.
Shares of other insurers like CNA Financial Corporation CNA and MetLife Inc. MET are also trading at a discount to the industry average.
To Conclude
Despite an expensive valuation, THG’s sustainable competitive advantage in the independent agency market, focus on further expansion of Specialty business, solid agency partnerships and lower exposure to property lines in challenging geographies make this Zacks Rank #2 stock worth buying. You can see the complete list of today’s Zacks #1 Rank stocks here.
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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.
