The Zacks Insurance industry is undervalued compared to the Zacks S&P 500 Composite and the Zacks Financials sector. The Insurance industry’s price-to-book ratio (the best multiple to value insurers given their unpredictable financial results) of 1.57 was lower than the Zacks S&P 500 Composite’s P/B of 8.57 and the sector’s P/B of 3.65. Such below-market positioning suggests upside potential in the coming days.
Image source: Zacks Investment Research
Image source: Zacks Investment Research
Therefore, it makes sense to find some undervalued stocks with growth potential before their valuation increases.
Driving forces
According to the Marsh Global Insurance Market Index, global commercial insurance rates remained flat in the second quarter of 2024. Price increases, operational strength, higher customer retention, strong renewals and retail agent appointments should help drive higher premiums. Gross written premiums are expected to increase six-fold to $722 billion by 2030, according to Deloitte Insights.
Analysts at the Swiss Re Institute forecast that premium volume will reach USD 4.6 trillion in 2024 and USD 4.8 trillion in 2025. According to the Swiss Re Institute, property and casualty insurers are expected to increase their profitability in 2024, with the industry-wide return on equity (ROE) standing at 10% so far in 2024. For 2025, the Swiss Re Institute expects an ROE of over 10%.
Verisk’s Extreme Event Solutions Group estimated Beryl damage to U.S. onshore wind turbines to be between $2 billion and $3 billion. According to Allstate, estimated disaster losses in July alone totaled $587 million from 20 events.
Multi-line insurers benefit from a diversified portfolio that reduces concentration risk. While higher demand for protection products boosts life insurance revenues and premiums, better pricing and greater exposure to intangible assets and cyber threats support non-life insurance premium growth. According to the Global Insurance Outlook 2024 published in Financial Services, U.S. demand for catastrophe reinsurance is expected to increase, putting upward pressure on pricing.
The insurance industry is interest rate sensitive. An improving interest rate environment is a boon for insurers, especially long-tail insurers. The Fed left interest rates unchanged at 5.25-5.5% at the December FOMC meeting. Given a large invested asset base, investment returns should remain healthy even if the Fed cuts rates later this year. In addition, insurance companies are investing heavily in technology to improve scale and efficiency. This should help them achieve higher margins and improve profitability.
Price-performance
The insurance industry has outperformed the Zacks S&P 500 Composite as well as the financials sector over the past year. The insurance industry has gained 31.6% compared to the Zacks S&P 500 Composite and the sector’s gains of 27.8% and 27.1%, respectively.
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Better pricing, more prudent underwriting and increased presence should help insurers maintain their momentum and stay well positioned for the long term.
Selection of value stocks
Using the Zacks Stock Screener, we have selected four insurance stocks with an impressive Value Score of A or B and a Zacks Rank #1 (Strong Buy) or #2 (Buy). Backtesting results have shown that stocks with a favorable Value Score and a solid Zacks Rank are the best investment options. You can find the complete list of today’s Zacks #1 Rank stocks here.
These growth stocks have seen positive estimate revisions, reflecting analysts’ confidence in their operating efficiency and a more favorable valuation.
Axis Capital Holdings Limited AXS offers various specialty insurance and reinsurance products worldwide. AXIS Capital continues to expand its specialty insurance, reinsurance and personal accident and health insurance lines to pave the way for long-term growth. In addition to strengthening the liability and professional lines in the insurance segment, the focus on prudent use of resources while increasing efficiency and improving the portfolio mix and underwriting profitability bodes well. The expected long-term earnings growth rate is 27.8%.
This insurer has beaten earnings estimates in each of the trailing four quarters, with an average outperformance of 94.62%. AXS currently has a Zacks Rank #1. AXS has a Value Score of A.
The company’s return on equity was 19.7% over the last 12 months. AXS also has an impressive VGM score of A.
Axis Capital’s P/B ratio is 1.26. The Zacks Consensus Estimate for 2024 earnings has moved 6.8% higher over the past 30 days and suggests an increase of 8.6% year over year. AXS shares have gained 40.4% over the past year.
NMI Holdings Inc NMIH provides private mortgage insurance through its wholly owned insurance subsidiaries in the United States. An improved mortgage insurance portfolio, a higher volume of new insurance contracts, a comprehensive reinsurance program, a solid capital position and effective use of capital pave the way for growth. The expected long-term earnings growth rate is 9.8%.
The stock currently has a P/B ratio of 1.55. The Zacks Consensus Estimate for 2024 earnings has moved 1.1% higher over the past seven days and suggests a year-over-year increase of 16.9%. Shares have gained 39.8% over the past year. It has a Zacks Rank of 2 and a Value Score of B.
The insurer’s return on equity was 18.2 percent over the last twelve months and it exceeded earnings expectations in each of the last four quarters, with an average overachievement of 10.15 percent.
MGIC Investment Corporation MTG is the largest private mortgage insurer in the United States. A higher insurance book, resulting from an increase in new business, higher annual consistency, a decrease in claims and loss payments, lower delinquencies, improving housing market fundamentals and prudent capital deployment, bodes well for growth. The expected long-term earnings growth rate is 6.8%.
The stock currently has a P/B ratio of 1.26. The Zacks Consensus Estimate for 2024 earnings has risen 2.2% over the past seven days, and the EPS estimate indicates a year-over-year increase of 9.1%. Shares have gained 43% over the past year. It has a Zacks Rank of 1 and a Value Score of B. The insurer’s return on equity was 14.9% over the trailing 12 months, and it beat earnings estimates in each of the trailing four quarters, with the average outperformance being 15.59%.
Old Republic International Corporation ORI specializes in insurance underwriting and related services and operates primarily in the United States and Canada. ORI’s solid market presence, niche focus, low property loss exposure to general insurance catastrophes, and solid capitalization provide promise for growth. ORI continues to strengthen its balance sheet by improving its cash position while reducing its leverage. Earnings have grown 10.3% over the past five years, better than the industry average of 9%.
The stock currently has a P/B ratio of 1.51. The Zacks Consensus Estimate for 2024 earnings has moved 4.4% higher over the past 30 days and indicates a year-over-year increase of 7.6%. Shares have gained 29.4% over the past year. It has a Zacks Rank of 2 and a Value Score of B. The insurer’s return on equity was 12.5% over the trailing 12 months, and it beat earnings estimates in three of the trailing four quarters and missed them in one quarter, with the average overachievement being 9.06%.
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MGIC Investment Corporation (MTG): Free Stock Analysis Report
Axis Capital Holdings Limited (AXS): Free Stock Analysis Report
Old Republic International Corporation (ORI): Free Stock Analysis Report
NMI Holdings Inc (NMIH): Free Stock Analysis Report
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