Lately, the property and casualty insurance business has been showing a few market outperformers, companies showing strong sings of post-crisis recoveries and aiming towards double-digit growth and above average profitability. Three very interesting companies in this sector are Hilltop Holdings Inc. (NYSE:HTH), ProAssurance Corporation (NYSE:PRA) and The Allstate Corporation (NYSE:ALL)
A promising stock
1) The company has mutated from a property-casualty insurance firm toward a successful banking operation, mainly on the back of the PlainsCapital acquisition in November 2012. This should considerably increase the earnings and stockholders’ equity in the upcoming years, especially as the purchased baking firm will not only expand Hilltop Holdings Inc. (NYSE:HTH)’s geographical presence and product portfolio, but will also continue to benefit from “the ongoing low interest rate environment and the refining housing sector, since these factors provide promising opportunities for investors to park their funds such high-quality banks.” (Zacks Research)
2) A couple of purchases that have taken place over the past semester portray an encouraging long-term outlook. On the one hand, John Martin´s (EVP/CFO of PlainsCapital) insider buy shows inside confidence in upcoming results. On the other hand, Chuck Royce increased his participation in this company by about 34%; with a quarter/quarter turnover of 6%, I would believe that tailing his buys is not such a bad idea.
3) Notwithstanding the operational challenges faced, Hilltop Holdings Inc. (NYSE:HTH) has managed to keep strong capital position and liquid and risk free balance sheet. While keeping $200 million in freely usable cash, the firm offers a Tier 1 Leverage Ratio of 13.39% and Total Capital Ratio of 18.58%.
4) Earnings rose at tremendous rates, reaching $0.39 last quarter, up 3800% year over year, mainly due to the business diversification that the PlainsCapital purchase provided and the top line growth delivered by NLASCO, its main revenue driver, on the back of an expanded product distribution and disciplined underwriting philosophy. This trend is expected to continue, as full year estimates portray earnings of $1.30 per share, up from last year’s loss of 12 cents.
A stock with solid market position
ProAssurance Corporation (NYSE:PRA) is another property-casualty insurance company that, like Hilltop, posted stronger than expected first quarter results and stands as a buy case for both the short and long-term. The company has a history surpassing analyst estimates and last quarter was no exception. Earnings came in at $0.97 per share, beating consensus estimate of $0.76 and rising 24% from the prior-year quarter, mainly on the back of an 8% growth in revenue, to $195 million, surpassing consensus estimate by 10%, and a 10% decrease in expenses, to $95 million.
In the long run, ProAssurance Corporation (NYSE:PRA)’s firmly established track record, solid competitive market position, prudent operating and financial leverage, responsible pricing, loss reserve practice and conservative investments in assets will likely generate fundamental growth. (Zacks)
Management track record is something to be highlighted in this company. Margins are outstanding: operating margin of 57.6% comfortably surpasses the 7.3% industry mean; same is the case of the 45.6% net margin, versus the industry average of 4.8%. Return on Assets and Return on Equity are also top in the industry reaching 6.5% and 14.5% respectively. Furthermore, capital management has also been exceptional, resulting in very healthy loss reserves and a low-risk balance sheet with an 0.1 debt to equity ratio. Capital deployments have proven beneficial for investors, as the firm´s strong cash position has enabled it to both repurchase considerable amounts of stock and pay cash dividends, yielding 2%.
While rating agencies like A.M. Best and Fitch have recognized ProAssurance Corporation (NYSE:PRA)´s financial strength and long-term credit rating, its stock price doesn’t seem to reflect it. Trading at only 9.4 times its earnings, versus the 12.8 times industry mean, I would recommend getting hold of this stock while it is still cheap as earnings upside proves to be plenty (projected in 10% over the next 5 years).
Another good bet
Yet another potential outperformer in the property-casualty insurance sector for both the short and long-run is The Allstate Corporation (NYSE:ALL). Although its first quarter came in sluggish due to high catastrophe losses, leading to greater claims and operating expenses, earnings surpassed consensus estimates. The negative results were somewhat counterbalanced by improved premiums and a 12.7% upsurge in book value per share. Trading at only 10.21 times consensus earnings, below the 13.93 times industry average, I’d say this stock is a buy.
For starters, The Allstate Corporation (NYSE:ALL)´s scale provides it with access to lower costs and a high amount of customers between which fix costs can be divided. As a consequence, the company can offer lower prices for policies than most of its competitors. This has been reflected in a much steadier profitability than its peers.
Meanwhile, the company seems well protected from competition since, unlike its peers that offer its products through independent agents, it relies on network of about 10,000 exclusive agencies only selling the firm´s products.
Further encouraging is management´s administration of investments. On the one hand, it has considerably ameliorated its risk profile by selling risky investments. On the other, it has made some highly profitable strategic investments directed to improve the performance of some underachieving sectors. Best example is the online auto insurance sales, which retrieved boosted results after the acquisition of Esurance and Answer Financial from White Mountains Insurance Group, third largest in the U.S.
Moreover, management has also been successful in actively administering cash flows and risks while increasing shareholder value. The Allstate Corporation (NYSE:ALL) pays a 2% dividend yield and has been consistently repurchasing stock for almost 20 years. Several buybacks are bound to occur in the future, especially since the company is sufficiently liquid to continue with planned repurchases while maintaining good leverage levels.
Bottom line
Above I have presented three insurance companies that offer very compelling growth prospects at reasonable valuations. Expected to outperform the market and grow at above average rates, all of these firms deserve a look and constitute a potential buy. Choosing which one you like the most is up to you.
The article 3 Names in the Property & Casualty Insurance Business originally appeared on Fool.com and is written by Victor Selva.
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