Investing in insurance stocks is an excellent strategy for long-term gains, as the industry has proven itself to be strong and anti-fragile even in the midst of a global crisis and uncertainty. The insurance industry is vast and has a huge potential for innovation and growth. The industry as a whole generates about $5 trillion in annual revenue. The coronavirus crisis has forced everyone to prepare for uncertainty and different kinds of risks. Individuals, small and large businesses, nonprofits and even governments will start implementing different mechanisms of financial protection and risk mitigation to foresee and avert uncertainties in the future. This will help insurance companies expand their businesses and footprints. Over the past several years, however, insurers have learned some key insights the hard way, which will help them thrive in the future.
Growth Catalysts for Insurance Stocks
Global penetration of life insurers fell to 3% over the last 10 years, while premium growth in the developed markets is struggling to meet acceptable metrics. Globally depressed interest rates and the coronavirus-triggered uncertainties have also battered investment portfolio returns. But some promising growth catalysts are on the horizon for insurance stocks. McKinsey said in a report that insurance companies will benefit from the rising customer demand, especially after the coronavirus outbreak. Rising healthcare costs and expanding middle class will also help insurance companies. The report said that life insurance companies will see a huge demand in the coming years because the number of people aged 60 and older will grow from 900 million in 2015 to 1.4 billion in 2030.
McKinsey also said insurance companies can develop more offerings to benefit from the evolving needs and risks worldwide. The firm said that with household debts remaining more than 100% of net disposable income in most OECD countries, rising divorce rates, increasing job insecurity, new and flexible offerings could help insurers increase their coverage and footprint in the market.
Oracle of Omaha Loves Insurance Businesses
Perhaps one of the biggest reasons why you should pay attention to insurance stocks is that legendary investor Warren Buffet loves them. The Oracle of Omaha said in a Q&A session with investors that insurance businesses don’t need much capital, and they own assets which he’d like to own anyway. He also said that insurance has been the most crucial factor behind Berkshire Hathaway’s growth.
However, blind faith in any investor, despite their stature, is not a suitable option in the modern financial markets, given the uncertainty. The financial markets worldwide are becoming volatile. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
In a December 2020 report, ratings agency Moody’s said that the 2021 outlook for the US property & casualty personal insurance sector is stable, showing auto carriers' “robust underwriting results” amid lower claim frequencies, and homeowner carriers' prudent response to natural catastrophes.
The agency said that homeowners premiums will grow by mid-single digits through 2020-21 based on growth in policies in force and rising rates.
Let's get straight to the list of 10 best insurance stocks to buy now. Our ranking criteria is based on the positions of famous hedge funds tracked by Insider Monkey, the fundamentals of the stocks and future growth catalysts
10. Aflac (NYSE:AFL)
Columbus, Georgia-based Aflac ranks 10th on the list of 10 best insurance stocks to buy now. It is one of the largest providers of supplemental insurance in the country.
Earlier in January, Morgan Stanley analyst Nigel Dally upgraded Aflac (NYSE:AFL) to Overweight. The analyst said that Aflac is "the leading undervalued cash flow return story" in the life insurance industry. Dally said that the company’s excess capital is estimated to be at $34 billion.
Ken Griffin’s Citadel Investment Group is one of the top hedge funds in Insider Monkey’s database having stakes in Aflac. Overall, 34 hedge funds in our database were bullish on the company, with $479.1 million worth of stakes.
9. Prudential Financial Inc (NYSE: PRU)
Prudential ranks 9th on the list of 10 best insurance stocks to buy now. New Jersey-based Prudential is a Fortune 500 company, with total assets worth about $1.3 trillion. The company sells life insurance, annuities, mutual funds, pension-related investments and asset management services. In the third quarter, Prudential posted a non-GAAP EPS of $3.21, above the Street’s estimates by $0.54.
Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital owns 4.13 million shares of Prudential, as of the end of the third quarter. The total value of these stakes is $262.17 million. Overall, 34 hedge funds tracked by Insider Monkey held stakes in the company entering the fourth quarter.
8. Metlife Inc (NYSE: MET)
MET ranks 8th in our list of the best insurance stocks to buy. MetLife is the holding company for Metropolitan Life Insurance Company , which is among the largest global providers of insurance, annuities, and employee benefit program.
MetLife shares rallied earlier in January after Piper Sandler upgraded the stock to Overweight from Neutral with a $52 price target, increased from $45. Piper Sandler’s analyst John Barnidge cited expectations for reduced earnings volatility amid the company’s sale of its property and casualty business for the upgrade.
As of the end of the third quarter, 36 hedge funds reported owning stakes in MetLife, more than 31 funds a quarter earlier. The total value of these investments is $920.75 million. Diamond Hill Capital was bullish about Metlife in April. Here is what they said:
“Life insurance company MetLife, Inc. underperformed due to fears around the potential impacts arising from lower interest rates, credit risks, and equity market drawdowns. Despite these concerns, we remain comfortable with our holding as we believe the fears significantly overstate the fundamental impact to the business.”
7. American International Group Inc (NYSE: AIG)
AIG ranks 7th in our list of the best insurance stocks to buy now. AIG is a major insurance company with operations in about 80 countries. In the third quarter, AIG reported an EPS $0.81, above the Wall Street estimates of $0.55. In the period, total net investment income on adjusted pretax income basis totaled $3.20 billion. In October, AIG shares rallied after the company announced to separate its life and retirement business from the parent. Bank of America analyst Joshua Shanker said the decision would unlock value, increase focus and shareholder returns.
Natixis Global Asset Management’s Harris Associates 31.35 million shares of AIG as of the end of the third quarter, having a total worth of $863.18 million. Overall, 38 hedge funds out of 816 tracked by Insider Monkey held positions in the company entering the fourth quarter. First Pacific Advisors were loading up on AIG this spring. Here is what they said:
“During the initial market decline, AIG sank more than 60 percent, dramatically underperforming its peers in what we believe will prove to be an overreaction. Life insurance companies were down 40 percent to 50 percent while their property and casualty, or P&C, peers were down 20 percent to 30 percent.8 Our conviction in AIG stems from several factors. We do not think its life insurance business, which accounts for 40 percent of premiums, will be overly affected as we are thankfully seeing a flattening of the COVID-19 infection curve. Its P&C business, generating about 60 percent of premiums, does not cover pandemics. Some states have said they may try to force coverage of pandemics, but we are confident the U.S. Constitution does not allow such a retroactive revision. There also is a case to be made that reduced activity around the country will lower P&C claims. We believe that AIG has earnings power in the next few years of around $6 per share. Panicked selling caused its stock price to trade as low as an unchallenging 0.3 times tangible equity. We added to the Fund’s position in AIG on this weakness.”
6. Allstate Corp (NYSE: ALL)
Illinois-based Allstate ranked 79th in the 2019 Fortune 500 list of the largest U.S. corporations by total revenue. In December 2020, BofA said in a report that Allstate is one of the two P&C companies that will outperform expectations in 2021 as their personal lines and mortgage insurance are likely to help them deliver better-than-expected ROE and BVPS results. The bank has a Buy rating for Allstate shares, with a price target of $151.
Allstate ranks 6th on the list of 10 best insurance stocks to buy now, as 38 hedge funds tracked by Insider Monkey held stakes in the company, worth $1.25 billion. Generation PMCA talked about Allstate in its 2020 Q2 investor letter:
“Allstate, the second largest personal auto and home insurance writer in the U.S., should see earnings expand this year, during a challenging period when most companies aren’t expected to deliver year-over-year earnings growth. Higher mortality rates from coronavirus are being offset by lower mortality outside of virus-related deaths and expense control. In auto, the benefits of lower miles driven due to the pandemic offset auto rebates. Historically, Allstate’s scale and conservative underwriting have translated to superior profitability metrics. The company is on pace to achieve a mid-teen return on equity for ’21, well above peers. However, with shares currently at 1.3x book value, Allstate trades at a discount to competitors. We believe skepticism around recent acquisitions to diversify away from life and auto insurance (e.g., identify theft and warranties) is the reason for its discounted valuation. We expect the company to continue to cast its net further afield given the long-term threat of autonomous vehicles to its automobile franchise. We are comfortable with the strategy, especially since these acquisitions are immaterial. Meanwhile, the company should continue to post peer-beating results. Our FMV estimate is $120.”
5. Chubb Ltd (NYSE: CB)
Headquartered in Switzerland, Chubb offers insurance services for property, casualty, accident, health, reinsurance, and life. It is one of the largest publicly traded property and casualty company in the world, having operations in 54 countries.
In November 2020, Barclays’ analyst Tracy Benguigui named Chubb as one of the top picks in the non-life insurer space. The analyst said that the coronavirus pandemic has triggered “much-needed foundational underwriting improvements.
Andreas Halvorsen’s Viking Global is the leading hedge fund having stakes in Chubb as of the end of the third quarter, with 3.42 million shares of the company, worth $396.67 million. Overall, 45 hedge funds tracked by Insider Monkey have stakes in Chubb. Fiduciary Management shared its bullish CB thesis in its 2020 Q3 investor letter:
Chubb is one of the largest publicly traded property and casualty (P&C) insurance companies globally. In aggregate, the company has operations in 54 countries and territories. Chubb provides commercial, personal property, casualty, personal accident, and supplemental health insurance to a diverse group of clients. Approximately 63% of premiums are from the U.S., 13% from Europe/Eurasia and Africa, 11% from Asia, 7% from Latin America, and 6% from Bermuda and Canada. By product, the mix is Commercial P&C 55%, Personal Lines 21%, Accident & Health/Life 17%, Agriculture 5%, and Reinsurance 2%. The Chubb brand is probably best known as the leading provider of insurance to high net worth individuals.
• Chubb is a durable, differentiated multi-line insurer with an attractive small and middle market commercial book of business, as well as a respected high net worth personal lines customer base.
• For medium to larger-sized commercial enterprises, casualty insurance is a necessity coverage. This nondiscretionary attribute, along with Chubb’s emphasis on high service levels, results in strong customer retention and predictable revenues. The company’s renewal retention ratio generally ranges between 85 to 90% (it was 95% in 2019 for major accounts).
• Chubb’s disciplined risk selection and cycle management has led to conservative initial loss picks, underwriting stability, and a consistent return on equity (ROE).
• Over the past ten years the company’s underwriting combined ratio is 7.6% better than the industry.
• Operating expenses are over 4% lower than large cap peers.
• The company presently generates a 14% return on tangible equity. Incremental returns on invested capital are attractive.
• Chubb currently maintains industry-low balance sheet leverage metrics across the three most important indicators of net premiums to shareholder’s equity (0.6 times), invested assets to shareholder’s equity (2.0 times), and debt-to-total capital (22%). The company’s investment portfolio is purposefully “plain vanilla.”
• The investment portfolio duration is four years with an average credit quality of A/Aa.
• Over the past 25 years, Chubb’s price-to-book multiple has averaged close to 1.5 times, ranging from a low of one times to a high of over two times, and it currently trades below book value. At 1.5 times book value per share, the stock would be valued at $182 per share.
• Over the past ten years, Chubb has grown book value per share at a 6% compound annual growth rate. The dividend yield is 2.7%.
• Chubb has a diverse and highly respected management team led by Chairman and CEO Evan Greenberg, who personally owns $122 million in stock.
• Management is compensated based upon key financial metrics (75% overall weight) of tangible book value per share growth, core operating ROE, core operating income, and the P&C combined ratio. The residual quarter of incentive compensation is determined by operational and strategic goals.
• Mr. Greenberg’s management team has been a cohesive group with backgrounds tying back to legacy ACE Limited and supplemented by key individuals staying on from the legacy Chubb organization.
• Philip Bancroft has been the CFO of Chubb Limited since January 2002.
Chubb is one of the largest P&C insurers globally and has a specialty in high net worth personal lines. Chubb has industry-leading combined ratios and is led by one of the best insurance CEOs in the industry. The company is benefitting from the industry underpricing risks the last few years, which has led to firming pricing without the reserve charges taken by many of its peers. This has driven the best premium growth in many years. With regard to COVID specifically, there is talk about regulators or governments forcing insurance companies to pay business interruption claims even though the policies specifically exclude viruses and pandemics. There is no court ruling or other precedent for this complete disregard for contract law, and we view the probability that this intervention holds up in court as very low.”
4. Progressive Corp (NYSE: PGR)
Progressive ranks 3rd on the list of 10 best insurance stocks to buy now. Progressive is one of the largest providers of car insurance in the country. The company insures motorcycles, boats, RVs, and commercial vehicles and also provides home insurance. The company ranked 99th in Fortune’s list of the largest U.S. corporations by total revenue.
A total of 47 hedge funds out of the 816 tracked by Insider Monkey held stakes in Progressive entering the fourth quarter. The net worth of these positions is about $1.7 billion.
J.P. Morgan recently gave upbeat comments about Progressive on the back of a strong market recovery expected in 2021. We recently shared Wedgewood Partners’ detailed PGR thesis. Here is an excerpt from that article:
As of the Company’s most recent monthly (November) earnings release, it looks like business is starting to return to normal. Companywide policies in force increased +11%, year-overyear. Total personal auto policies in force increased to 16.5 million, +11% – with direct policies up +13% and agency policies up +9%. November net premiums written of $2.96 billion increased a healthy +14% year-over-year, while net premiums earned of $3.2 billion increased +11%. Lastly, the Company’s combined ratio snapped back to a smart 86.6 from 94.1 in October. The Company will likely exit 2020 with +$38 billion in net premiums written and +25 million policies in force.
Due to the relative consistency of the Company’s business model, our expectations of future annual profitability and growth largely mirror that of the recent past. Specifically, we expect both policies in force and revenues to grow at a high single-digit rate and a combined ratio of 93-95. We expect more variability in returns on capital and earnings growth. The last few years have been exceptional with returns on equity ranging from 26% to 32%, above the more typical range in the high teens. We would be thrilled with sustainable ROE’s from 20% to 25%. We also would be happy with earnings growth, lumpy as it typically is, between a high single-digit and low double-digit range.
At current valuations, the stock is far from a screaming bargain (what is these days?), hence our initial position size of just a 2.5% weighting. Future risks to consider that the Company must navigate are margin compression and/or if growth in policies in force decline due to heightened competitive pressures, including fluctuating fears of autonomous vehicles (AV). We look forward to building our position in Progressive as opportunity knocks.”
3. Aon PLC (NYSE: AON)
Aon offers insurance, financial risk-mitigation and pension services. The company was created in 1982 as a result of the merger of Ryan Insurance Group and Combined Insurance Company of America.
In the third quarter, Aon said its operating margin increased 340 basis points to 18.5%, while EPS jumped 27% in the quarter to reach $1.18.
Tom Gayner’s Markel Gayner Asset Management is one of the 52 hedge funds having stakes in Aon as of the end of the third quarter. The fund owns 37,000 shares of the company, worth $7.63 million.
2. Anthem Inc (NYSE: ANTM)
Indiana-based Anthem is one of the largest for-profit managed health insurance company in the U.S. Anthem also ranks 29th on the Fortune 500 list. In the third quarter, Anthem’s revenue increased by 15% to reach $30.65 billion, above the consensus estimate of $29.88 billion.
Boykin Curry’s Eagle Capital Management owns about 2.58 million Anthem shares as of the end of the third quarter, worth 694.01 million. Overall, 65 hedge funds tracked by Insider Monkey held stakes in the company entering the fourth quarter. Anthem is among the cheapest health insurance companies and it may be an acquisition target.
1. Berkshire Hathaway Inc. Class A (NYSE: BRK.A)
Berkshire Hathaway offers life, accident, property and casualty risks insurance services through its insurance subsidiaries. The company penetrated the insurance industry though several key acquisitions. In 1996, Berkshire acquired Maryland-based GEICO, which is an auto insurance company. In 1998 Berkshire bought Connecticut-based Gen Re, which is a multinational insurance company offering services in property, casualty, life and health. Berkshire also bought Dutch insurer NRG in 2007.
Berkshire tops the list of 10 best insurance stocks to buy now, as the stock was in the portfolios of 109 elite hedge funds tracked by Insider Monkey, as of the end of the third quarter. Nomadic Value Investment Partners think Berkshire is the best stock to buy in the market. Here is what they said:
“We added to Berkshire Hathaway. I won’t spend too much talking about this, but BRK is as attractively priced as it’s been in some time. The press’s and FinTwit’s fascination with “Warren’s lost it” is at a cyclical peak and is complete noise. However, the valid bear argument is that BRK is too big to compound at good rates going forward, and subsidiary company performance will be weak for the next couple of years with its high exposure to air traffic (Precision Cast Parts and previously held airline stocks) and holdings in “old economy” manufacturing and retail businesses. Also, short-term there’s an unknown consequence of insurance claim payouts and/or refunds13 . We wouldn’t completely disagree with these judgments, and the optics are certainly bad when BRK doesn’t buy back shares in a quarter with a substantial sell-down. However, with a long-term lens and given the management style of BRK (conservative talk and overperform), we will likely be quite satisfied in the future – whatever that looks like. Meanwhile, we’ve gotten into a range where 30%-50% of BRK is free. Are the actual growth prospects for Berkshire this dire? Berkshire is our largest position.”