Near-Term Outlook for P&C Insurance Industry Appears Gloomy

The Zacks Property and Casualty Insurance (P&C) industry comprises companies that provide commercial and personal property and casualty insurance products and services. Such insurance coverage helps to safeguard property in case of any natural or man-made disasters. Liability coverages are also part of this industry.

Insurance coverages provided by the companies include commercial and personal properties, automobiles, professional risk, marine, excess casualty, aviation, personal accident, commercial multi-peril, professional indemnity, surety, among others.

Premiums are the primary source of revenues for these insurers. These companies invest a portion of premiums collected to meet their commitments to policyholders. Thus, a rising rate environment is a boon for P&C insurers.

Here are the three major themes in the industry:

  • The P&C insurance industry is affected by natural catastrophes or man-made disasters. The industry enjoyed a benign catastrophe environment for a few years following 2011, which helped it build reserve. Nonetheless, 2017 turned out to be the costliest in terms of catastrophe loss while the second half of 2018 was marked by frequent natural disasters of significant magnitude. Though capital reserve kept these insurers afloat, underwriting profitability suffered and combined ratio deteriorated.

  • Following the 2017 catastrophe loss, insurers started hiking price that had been soft for long. While insurers managed to raise prices for most lines of business, workers compensation and international liability pricing continue to remain soft. Also, surplus capital level has been putting pressure on desired price hikes. Prudent pricing helps safeguard profitability of insurers and maintain competitive edge. Also, with economic growth and a strong labor market, insured exposure should increase, given the frequency and magnitude of catastrophic events.

  • Given a not-so-active catastrophe environment post 2011 through 2016, insurers were able to build a sturdy capital level, which is helping them pursue mergers and acquisitions aggressively. Moreover, increasing adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain should help insurers curb operational costs.

Zacks Industry Rank Indicates Bleak Prospects

The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates weak prospects in the near term. The Zacks Property and Casualty Insurance industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #192, which places it in the bottom 26% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. In a quarter's time, the industry's earnings estimates for the current year have gone down 3.7%.

Before we present a few property and casualty stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Beats S&P 500 and Sector

The Property and Casualty Insurance industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively declined 4.7% in the past year while the Finance sector has dipped 16.2%. Meanwhile, the Zacks S&P 500 composite has decreased 8%.

One-Year Price Performance

Current Valuation

On the basis of trailing 12-month price-to-book (P/B) ratio, which is commonly used for valuing insurance stocks, the industry is currently trading at 1.31X compared with the S&P 500's 3.51X and the sector's 2.26X.

Over the past five years, the industry has traded as high as 1.66X, as low as 1.25X and at the median of 1.48X.

Price-to-Book (P/B) Ratio (TTM)

Price-to-Book (P/B) Ratio (TTM)

Bottom Line

Prudent underwriting practices, competitive pricing and a compelling product portfolio should continue to drive bottom line for P&C insurers. Moreover, a sturdy capital level should place insurers well to pursue mergers and acquisitions, invest in technologies and return capital to shareholders.

Nonetheless, exposure to unforeseen catastrophe events and unpredictable magnitude of losses remain concerns for P&C insurers.

Stocks to Consider

Investors may consider buying the following stocks that carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Mercury General Corp. (MCY): This writer of personal automobile and homeowners insurance in the United States is based in Los Angeles, CA. The Zacks Consensus Estimate for 2019 EPS has moved nearly 26% north over the past 60 days. As a results, the stock currently carries a Zacks Rank #1.

National General Holdings Corp.

State Auto Financial Corp.

Atlas Financial Holdings, Inc.

Cincinnati Financial Corp.

Heritage Insurance Holdings, Inc . (HRTG): This Clearwater, FL -based company provides personal and commercial residential insurance products. The stock carries a Zacks Rank of 2. The consensus estimate for 2019 EPS has moved up 2.9% over the past 60 days.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

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

State Auto Financial Corporation (STFC): Free Stock Analysis Report

National General Holdings Corp (NGHC): Free Stock Analysis Report

Mercury General Corporation (MCY): Free Stock Analysis Report

Heritage Insurance Holdings, Inc. (HRTG): Free Stock Analysis Report

Cincinnati Financial Corporation (CINF): Free Stock Analysis Report

Atlas Financial Holdings, Inc. (AFH): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.