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%.
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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