Economic growth and expansion, regulatory compliance, the surge in ownership and value assets, lending and financing requirements, and business operational risks typically lead to increased demand for P&C insurance coverage, propelling the industry’s prospects.
Therefore, investors could buy fundamentally sound insurance stock Mercury General Corporation (MCY), but waiting for a better entry point in Berkshire Hathaway Inc. (BRK.B) could be wise.
Economic growth is a primary force driving the expansion of the P&C insurance market. As economies thrive, there is a significant surge in property values, business activities, and asset ownership. With heightened economic activity and individuals and businesses amassing diverse assets like homes, vehicles, and valuables, the demand for insurance coverage intensifies.
The global property & casualty insurance market is projected to total $3.11 trillion by 2028, growing at a CAGR of 6.9%.
Swiss Re Institute’s forecast for 2024 for the U.S. P&C insurance industry is favorable, with anticipated solid premium growth and easing inflation pressures. A higher industry return on equity (ROE) is expected as personal lines margin improves. Industry ROE is forecasted at 9.5% in 2024 and 10% in 2025, backed by premium growth of 7% and 4.5% in these respective years.
According to the report by Mordor Intelligence, the U.S. property and casualty insurance market is estimated to grow at a CAGR of nearly 6% from 2024 to 2029. Robotic Process Automation (RPA) is the major trend shaping the industry. Adoption of the RPA in insurance has benefits like faster claims processing, easier policy cancellation, simplified business onboarding, and more.
Moreover, numerous innovations in technology, including artificial intelligence (AI), data analytics, and telematics, are transforming the insurance industry. P&C insurers leverage these technological advancements to improve risk assessment, enhance customer experiences, streamline operations, and develop new products tailored to emerging risks.
Investors’ interest in insurance stocks is evident from the Invesco KBW Property & Casualty Insurance ETF’s (KBWP) 23.6% returns over the past six months.
Considering the favorable market trends, let’s evaluate the two Insurance - Property & Casualty stock picks, beginning with the second choice.
Stock to Hold:
Stock #2: Berkshire Hathaway Inc. (BRK.B)
BRK.B engages in the insurance, freight rail transportation, and utility businesses globally. The company offers property, casualty, life, accident, and health insurance and reinsurance; and operates railroad systems in North America. Also, it generates, stores, and distributes electricity from natural gas, coal, wind, solar, nuclear, and geothermal sources.
On January 16, 2024, BRK.B acquired Pilot Corporation’s remaining 20% interest in Pilot Travel Centers LLC. Berkshire Hathaway now owns 100% of Pilot Travel Centers, a leading operator of petroleum filling stations. This strategic acquisition should bode well for the company.
BRK.B’s trailing-12-month EBITDA margin and net income margin of 37.23% and 26.40% are higher than the respective industry averages of 21.13% and 23.53%. However, the stock’s trailing-12-month gross profit margin of 33.80% is 43.3% lower than the industry average of 59.62%.
In terms of forward non-GAAP P/E, BRK.B is currently trading at 21.14x, 101.4% higher than the industry average of 10.49x. However, the stock’s forward EV/Sales multiple of 2.35 is 23.8% lower than the industry average of 3.09.
For the fiscal year that ended December 31, 2023, BRK.B’s total revenues increased 20.7% year-over-year to $364.48 billion, and its revenues from Insurance and Other grew 5.3% from the prior year to $263.07 billion. Its net earnings attributable to Berkshire Hathaway shareholders came in at $96.22 billion, compared to a net loss of $22.76 billion in the previous year.
Analysts expect BRK.B’s revenue for the fiscal year (ending December 2024) to decline marginally year-over-year to $361.08 billion. However, the company’s EPS for the ongoing year is expected to grow 11% year-over-year to $19.07. Moreover, Berkshire Hathaway surpassed consensus EPS estimates in each of the trailing four quarters.
BRK.B’s stock has surged 10.7% over the past six months and 33.6% over the past year to close the last trading session at $404.76.
BRK.B’s mixed prospects are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
BRK.B has a B grade for Momentum. It has a C grade for Quality. But the stock has a D grade for Growth. It has ranked #43 out of 55 stocks in the B-rated Insurance - Property & Casualty industry.
In addition to the POWR Ratings stated above, one can access BRK.B’s ratings for Value, Stability, and Sentiment here.
Stock to Buy:
Stock #1: Mercury General Corporation (MCY)
MCY engages in writing personal automobile insurance. In addition, the company writes homeowners, commercial automobile, commercial property, mechanical protection, and umbrella insurance products. The company sells its policies through a network of independent agents, insurance agencies, and directly through internet sales portals across the U.S.
In February 2024, MCY’s Board of Directors declared a quarterly dividend of $0.32 per share. The dividend is payable on March 27, 2024, to shareholders of record on March 13, 2024. The company pays an annual dividend of $1.27, which translates to a yield of 2.63% at the current share price.
MCY’s trailing-12-month levered FCF margin of 41.07% is 116.6% higher than the industry average of 18.96%. In addition, the stock’s trailing-12-month ROTA of 1.36% is 25.2% higher than the industry average of 1.08%.
In the fourth quarter that ended December 31, 2023, MCY’s net premiums earned grew 13.9% year-over-year to $1.14 billion, and its total revenues came in at $1.37 billion, up 19.4% year-over-year. The company’s net income was $191.39 million, or $3.46 per share, compared to a net loss of $6.77 million, or $0.12 in the previous year’s quarter, respectively.
Furthermore, the company’s cash came in at $550.90 million as of December 31, 2023, compared to $289.78 million as of December 31, 2022. Its total assets were $7.20 billion versus $6.51 billion as of December 31, 2022.
Street expects MCY’s revenue to grow 17.6% year-over-year to $5.25 billion for the fiscal year ending December 2024. Similarly, the consensus EPS estimate of $2.90 billion for the current year indicates an improvement of 866.7% year-over-year. Also, the company has topped consensus revenue estimates in three of the trailing four quarters, which is impressive.
Shares of MCY have gained 66.1% over the past six months and 59.2% over the past year to close the last trading session at $47.22.
MCY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
MCY has an A grade for Sentiment and a B for Growth and Momentum. It is ranked #2 among 55 stocks within the same industry.
Beyond what is stated above, we’ve also rated MCY for Value, Quality, and Stability. Get all MCY ratings here.
What To Do Next?
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BRK.B shares were unchanged in premarket trading Tuesday. Year-to-date, BRK.B has gained 13.49%, versus a 7.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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