While the profitability of most sectors gets affected by interest rate increases, the insurance industry tends to benefit from it. Moreover, the insurance business performs steadily regardless of the economic cycle. Hence, investors could consider investing in quality insurance stocks Unipol (UFGSY), Universal Insurance (UVE), and Heritage Insurance (HRTG) this month. Read on….
Insurance companies benefit significantly from rising interest rates as their underlying bond investments yield solid returns in a high-rate environment. Therefore, this could be the right time to invest in fundamentally sound insurance stocks Unipol Gruppo S.p.A (UFGSY), Universal Insurance Holdings, Inc. (UVE), and Heritage Insurance Holdings, Inc. (HRTG).
Insurance is a business that generates revenue by charging premiums in exchange for coverage. Then those premiums are invested in other interest-generating assets. While rising interest rates affect the profitability of most industries, the financial sector, including insurers, typically benefits from it.
Insurers hold long-term safe bonds to meet their promised returns to policyholders, and they yield high returns amid a rising interest rate environment. Since March 2022, the Federal Reserve has rapidly raised its benchmark interest rates, making it more expensive for most companies to borrow money to run their operations.
Despite inflation cooling for the ninth consecutive month, the central bank will likely raise its policy rate again in May to a 5%-5.25% range, according to Fed Fund futures.
Not only do insurance companies thrive amid a rising interest rate environment, but they are also considered stable investments in recessionary times. Regardless of the environment, individuals and businesses must maintain home and auto insurance, life insurance coverage, etc., ensuring stable revenues for insurers with minimal downside.
According to Fact.MR analysis, the global property and casualty insurance market is projected to be valued at $1.38 million in 2023 and reach $2.65 million by 2033, growing at a CAGR of 10%. North America accounts for the largest share of the market and is likely to retain its dominance during the forecast period.
The growing adoption of advanced technologies in property and casualty procedures and rising per capita income are expected to drive the growth of the global property and casualty insurance market.
Investors' interest in insurance stocks is evident from iShares U.S. Insurance ETF's (IAK) 5.9% returns over the past month. Amid the backdrop, fundamentally strong insurance stocks UFGSY, UVE, and HRTG could be worth considering this month.
Let's take a closer look at the fundamentals of these stocks:
Unipol Gruppo S.p.A (UFGSY)
Headquartered in Bologna, Italy, UFGSY offers a wide range of insurance products and services. The company operates through Non-Life Insurance Business; Life Insurance Business; Real Estate Business; and Holding and Other Businesses segments.
In terms of forward EV/Sales, UFGSY is currently trading at 0.60x, 68.7% lower than the industry average of 1.91x. The stock's forward Price/Sales of 0.27x is 86.9% lower than the industry average of 2.09x. Moreover, its forward EV/EBIT multiple of 6.88 is 35.7% lower than the industry average of 10.71.
UFGSY's interest income increased 11.4% year-over-year to €1.54 billion ($1.69 billion) for the fiscal year that ended December 31, 2022. Its pre-tax profit for the year grew 16.6% from the year-ago value to €1.11 billion ($1.22 billion). The company's consolidated profit for the year came in at €865.90 million ($948.85 million), up 8.8% year-over-year.
Analysts expect UFGSY's revenue for the fiscal year 2024 to increase 13.6% year-over-year to $15.22 billion. Moreover, the company has surpassed the consensus revenue estimates in three of the trailing four quarters. Over the past year, the stock has declined 18.4% to close the last trading session at $2.22.
UFGSY'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. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
UFGSY has a B grade for Momentum, Value, Stability, and Sentiment. In the B-rated Insurance-Property & Casualty industry, it is ranked #4 out of 56 stocks.
Click here for the additional POWR Ratings for Growth and Quality for UFGSY.
Universal Insurance Holdings, Inc. (UVE)
UVE operates as an integrated insurance holding company in the United States. The company develops, markets, and underwrites insurance products for personal residential insurance, including homeowners, condo unit owners, and renters/tenants; and provides allied lines, coverage for other structures, and personal property, liability, and personal articles coverages.
UVE's forward EV/Sales of 0.23x is 88.1% lower than the industry average of 1.91x. Likewise, the stock's forward Price/Sales multiple of 0.44 is 78.9% lower than the industry average of 2.09.
For the fourth quarter that ended December 31, 2022, UVE's core revenue increased 11.3% year-over-year to $326.35 million. The growth in core revenue primarily stems from higher net premiums earned, net investment income, and commission revenue. The company's adjusted operating income was $30.47 million, compared to an adjusted operating loss of $63.43 in the prior-year period.
Furthermore, the company's adjusted net income and adjusted earnings per common share came in at $22.09 million and $0.72, compared to an adjusted net loss and adjusted loss per common share of $47.76 million and $1.53, respectively.
Analysts expect UVE's revenue for the first quarter (ended March 2023) to increase 12.7% year-over-year to $324.10 million. The consensus EPS estimate of $0.93 for the same period indicates an improvement of 45.3% year-over-year. Furthermore, the company's revenue and EPS for the fiscal year 2024 are expected to grow 8.2% and 45.5% year-over-year to $1.44 billion and $2.40, respectively.
Shares of UVE have gained 105.5% over the past six months and 56.5% over the past year to close the last trading session at $19.32.
UVE's solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
UVE has a B grade for Growth, Momentum, and Quality. Within the Insurance-Property & Casualty industry, it is ranked #5 of 56 stocks. To access UVE's ratings for Value, Sentiment, and Stability, click here.
Heritage Insurance Holdings, Inc. (HRTG)
HRTG is a property and casualty insurance holding company that provides personal and commercial residential insurance products. It is vertically integrated and controls or manages all aspects of insurance underwriting, customer service, actuarial analysis, distribution, claims processing, and adjusting.
In terms of forward Price/Book, HRTG's 0.63x is 34.6% lower than the 0.97x industry average. Also, the stock's forward Price/Sales of 0.11x is 94.6% lower than the industry average of 2.09x.
HRTG's revenue increased 4.7% year-over-year to $174.59 million for the fourth quarter that ended December 31, 2022. The company's adjusted net income grew 10.8% from the year-ago value to $12.50 million. In addition, its adjusted net income per share stood at $0.48, an increase of 17.1% year-over-year.
Analysts expect HRTG's revenue for the fiscal year (ending December 2023) to increase 3.4% year-over-year to $685.18 million. The company's revenue and EPS for the next fiscal year 2024 are expected to grow 9.7% and 525% year-over-year to $751.45 million and $0.63. Also, it has topped the consensus revenue estimates in all four trailing quarters, which is impressive.
The stock has gained 116.7% over the past six months to close the last trading session at $3.12.
HRTG's POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
HRTG has an A grade for Sentiment and a B for Value and Momentum. It is ranked #6 out of 56 stocks in the same industry.
In addition to the POWR Ratings stated above, we have also given HRTG grades for Growth, Quality, and Stability. Get all HRTG ratings here.
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UFGSY shares were unchanged in premarket trading Wednesday. Year-to-date, UFGSY has declined -16.23%, versus a 8.17% 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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