Here’s why you should own selective insurance stocks (SIGI) – December 20, 2021
Selective Insurance Group, Inc. (SIGI – Free Report) gained momentum, given pure renewal price increases, strong retention rates, new business growth and a strong financial position.
Selective Insurance’s expected long-term profit growth rate is set at 13.4%, which is above the industry average of 9.7%.
Zacks’ consensus estimate for 2021 and 2022 has moved 1.5% and 5.5% north, respectively, over the past 60 days, reflecting analyst optimism.
History of surprise earnings
Selective insurance has a history of decent income surprise. Its earnings beat estimates in each of the past four quarters, the average being 44.8%.
Zacks Ranking and Price Performance
Selective insurance currently carries a Zacks Rank # 3 (Hold). In the past year, the stock has climbed 21.7%, outpacing the industry’s increase of 13.2%.
Image source: Zacks Investment Research
Selective insurance is well positioned to progress, as evidenced by its favorable VGM score of A. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of the three factors.
Return on equity (ROE)
Selective Insurance’s ROE for the past 12 months is 15.3%, better than the industry average of 5.6%. This reflects its efficiency in using its shareholders’ funds.
Business tail winds
Given the sharp increases in refueling prices, growth in exposure, strong retention rates and strong new business growth in the Exceptional Business Lines and Surplus and Surplus (E&S) lines segments, Selective Insurance’s revenue is expected to improve going forward, which in turn will drive revenue growth.
Zacks’ consensus estimate for Selective Insurance’s 2021 and 2022 revenue is set at $ 3.4 billion and $ 3.7 billion, respectively, indicating a close year-over-year increase of 15.1% and 8.8%.
For 2021, SIGI projects net after-tax investment income of approximately $ 240 million, up from previous guidance of $ 220 million. It includes $ 75 million in net after-tax investment income from alternative investments, up from the $ 55 million announced earlier. The upside forecast reflects strong after-tax gains on alternative investments. The insurer has experienced five consecutive quarters of high income from alternatives.
Selective Insurance expects a GAAP combined ratio, excluding catastrophic losses, of 88%, which indicates an improvement over previous guidance of 89% and also reflects strong profitability.
Selective Insurance has an impressive level of solvency. Building on strong earnings, its book value per share is expected to increase. In the third quarter, SIGI repaid $ 50 million in Federal Home Loan Bank debt, reducing its debt-to-capital ratio to 14.6%.
Leveraging strong financial flexibility, SIGI is able to grow above its sustainable growth rate, which offers better growth opportunities.
At present, it has a remaining capacity of $ 96.6 million under the share repurchase program.
Actions to consider
Some of the best-ranked stocks in the P&C insurance industry are American financial premiere (FAF – Free report), Cincinnati Financial Corporation (CINF – Free report) and Berkshire Hathaway (BRK.B – Free report). While First American has a Zacks Rank # 1 (strong buy), Cincinnati Financial and Berkshire have a Zacks Rank # 2 (buy). You can see the full list of today’s Zacks # 1 Rank stocks here.
First American earnings have beaten estimates in each of the past four quarters, with an average pace of 29.19%. In the past year, First American has lost 43.8%. Zacks’ consensus estimate for 2021 and 2022 has moved 0.4% and 0.5% north, respectively, over the past 30 days.
Higher direct premiums and escrow fees, increased residential purchases and business transactions in the domestic market, higher operating revenues in the home warranty industry and higher net realized investment gains in the home warranty and property and casualty insurance business are likely to boost First American premium income.
Cincinnati Financial has beaten estimates in each of the past four quarters, with an average earnings surprise of 40.05%. Over the past year, Cincinnati Financial has grown 34.5%. Zacks’ consensus estimate for 2021 and 2022 has moved 1.3% and 5% north, respectively, in the past 60 days.
Cincinnati Financial is well positioned to benefit from premium growth initiatives, price increases and a higher level of insured exposures.
Berkshire Hathaway’s bottom line has beaten estimates in two of the past four quarters and missed the same in the other two, averaging 5.53%. Over the past year, Berkshire Hathaway has grown 31.4%. Zacks’ consensus estimate for BRK.B’s earnings in 2021 and 2022 implies year-over-year increases of 29.3% and 6.7%, respectively.
Berkshire Hathaway is expected to benefit from growth in its insurance business, manufacturing, services and retail, finance and financial products segments, as well as strategic acquisitions.