This Insurance Stock has 'About 25% Upside'

NEW YORK ( TheStreet) -- Infinity Property & Casualty ( IPCC) is a fascinating insurance niche play that has plenty of upside for investors over the next year, according to KBW analyst Vincent DeAugustino

Infinity Property & Casualty 's stock closed at $68.28 Thursday.  The shares have returned 16% this year, which is a respectable gain, but it's a significant underperformance compared to a 29% return for the S&P 500 and a 53% return for the KBW insurance Index. 

The auto insurer's stock trades for 18.7 times the consensus 2014 earnings estimate of $3.64 a share, among analysts polled by Thomson Reuters, and for 15.1 times the consensus 2015 EPS estimate of $4.53.  The analysts on average are estimating annual EPS growth of 43% in 2014 (from the consensus EPS estimate of $2.54 for 2013), and 24% in 2015. 

DeAugustino took over KBW's coverage of Infinity Property & Casualty on Thursday, with an "outperform" rating and a price target of $86, representing 26% upside over the next 12 months.

In a note to clients, DeAugustino called Infinity P&C "a uniquely positioned personal auto insurer likely to benefit from its own internal profitability improvement measures as well as demographic trends inherent to its Hispanic driver focus."

Infinity reported operating earnings of $23.3 million for the first three quarters of 2013, increasing 42% from $16.4 million a year earlier.  Earnings-per-share increased by 45% to $2.03 for the first three quarters from $1.40 during the prior-year period, as the company's share buyback program reduced its average share count. Infinity's common-share buybacks during the first three quarters totaled $9.6 million, and the company reported that as of Sept. 30 it was authorized for $44.9 million in additional stock repurchases.

The company's total revenues grew 11% year-over-year to $1.007 billion, mainly reflecting growth in earned premiums, with a slight reduction in investment income. 

The company's combined ratio -- incurred losses and expenses divided by earned premiums -- improved to to 97.9% during the first three quarters of 2013, from 99.7% a year earlier.  A combined ratio of less than 100% indicates an insurer's underwriting business is profitable.

Because of its focus on the Hispanic market, DeAugustino sees Infinity P&C as "a defensive alternative to national auto insurers, who will likely be more heavily pressured by emerging rate competition."

Demographic trends also work in the company's favor.

"We estimate that Hispanics between the age of 16-80 (i.e., driving age) will increase by 4.9 million between 2013 and 2018; about 13.2% growth versus total population growth of just 2.6%. In our view, this Hispanic focus implies much more robust top-line growth for IPCC compared to 'generalist' auto insurers, DeAugustino wrote.

The analyst added that Infinity P&C's special market focus has allowed the company to raise its insurance premium rates by 28% this year "in underperforming states and about 10% in well-performing states, which should contribute to an earnings recovery in 2014 and 2015, in conjunction with moderating loss cost trends."

DeAugustino is way out in front of the consensus, estimating Infinity Property & Casualty will earn $4.06 a share in 2014, with EPS growing to $5.59 in 2015, as the company's underwriting business continues to grow and it benefits "from a combination of shedding business in underperforming territories and from underperforming agencies."

Shares of Infinity Property & Casualty were up 1.2% in morning trading Friday, to $69.10.

The following chart shows Infinity P&C's underperformance this year against the S&P 500:

IPCC Chart IPCC data by YCharts

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