Don’t Miss: Best Insurance Stocks of January 2021
There are few stock types safer than insurance stocks. Tech and biotech stocks may give you short growth spurts, or they may go bust. On the other hand, once above a certain threshold, insurance companies are largely masters of their own fortunes.
Insurance as Society’s Safety Net
It is no understatement to say that the insurance industry is the glue that stabilizes modern civilization. By distributing the risk of the vagaries of life, insurance makes everything become more quantifiable, more predictable, and easier to recover if the worst comes to be. Although some would say that the insurance sector is recession-proof, that’s not quite true.
As you can see from the graph above, the net income in the property and casualty (P/C) insurance sector had been severely undermined during the 2008 – 2009 Financial Crisis. However, you can also see that it achieved a quick recovery. The source of this resilience comes from four levels:
- Investments in other business ventures.
- Many insurance policies are mandated by state law.
- The federal government tends to increase its insurance spending over time. In 2020 alone, it spent $57.17 billion on insurance.
- Even in an economic downturn, an insurance policy offers peace of mind.
Once you understand that, you understand why insurance stocks remain one of the top investment picks for iconic investors like Warren Buffet. Accordingly, this anti-fragility industry generating $5 trillion in yearly revenue should be a part of anyone’s investment portfolio, as reliable blue-chip stocks. As the pandemic lockdowns left behind job insecurity and shaky marriages, on top of the over-60 population growing to 1.4 billion in 2030, the demand for flexible insurance policies should see steady growth.
3 Insurance Stocks with Potential
Trading stocks continues to see increased popularity in the United States. With a number of popular apps for stock trading available, those with smartphones now have everything needed to access the stock market.
Here are a few insurance stocks which show some signs of growth.
1. Progressive Corp (NASDAQ: PGR)
Primarily known for its deep penetration into the car insurance market, including RVs, boats, and motorcycles, PGR also offers home insurance, liability and worker’s comp. Recently, PGR has begun bundling auto and home insurance, further increasing its competitive edge against its foremost rival GEICO. As both a direct insurer and as an independent agency, PGR is positioned at 99th place on the Fortune 500’s ranking of largest American corporations by total revenue.
From the company’s November earnings report, it has reported year-over-year (YoY) growth across the board:
- Overall insurance policies increased by 11%
- Personal auto policies increased to 16.5 million: +13% direct policies, +9% agency policies.
Likewise, PGR’s net premiums increased by 14% YoY, at $2.96 billion, of which net premiums accounted for an 11% increase, at $3.2 billion. Altogether, PGR’s combined ratio – profitability measure for daily operations (lower is better) – shrank from 94.1 in October to 86.6 in November, which means that the company is receiving more in premiums than it is paying out claims.
As a result, PGR should end 2020 with a net positive of $38 billion in premiums, with a 25 million increase in policies in force (all due premiums have been paid off). In the near future, PGR is likely to continue this steady growth, with an ROE (return on equity) in the low double-digit range.
2. Aon plc (NASDAQ:AON)
Birthed from the merger of Combined Insurance Company of America and Ryan Insurance Group in 1982, Aon covers pension plans, personal and professional financial liability and a wide range of specialty insurance policies, including pet and private events insurance. Following the end of Q3 2020, Aon is in bullish territory.
It owes this optimism to increase in operating margin by 340 basis points, to 18.5%, while its earnings per share (EPS) increased by 27%. This growth constitutes a streak of 3 out of 4 last quarters, giving the company an average earnings surprise (when annual profits exceed forecasts) of 1.1%. Having positioned itself as one of the largest insurance brokers, Aon’s one-year ROE of 65% is well above the industry’s average of 27.6%.
Thanks to expertly streamlining its operations, selling off its baggage and restructuring, Aon managed to lower the operating costs by 7% during the first nine months of 2020. To spur the interest of investors, Aon’s recent board of directors’ decision authorized a share buyback program worth $5 billion. In turn, according to the Zacks Consensus Estimate, Aon should achieve a rise of 5.3% year-to-date, by ~ $9.66.
3. Berkshire Hathaway (NASDAQ: BRK.A)
Lastly, the legendary company that the equally famous billionaire philanthropist, Warren Buffet, transformed from a textile mill to global insurance and asset management company. After absorbing GEICO in 1996, Gen Re in 1998, and NRG in 2007, Berkshire Hathaway covers the entire spectrum of insurance, from auto to health and life.
Although an easy call to put such a blue-chip stock in your diversified portfolio, it bears keeping in mind the timing. Sometimes, blue-chip stocks can be undervalued or overvalued. With BRK, its management style is to issue conservative forecasts that are then, more often than not, outperformed.
Furthermore, despite the pandemic drag, its Q3 2020 earnings report did not disappoint. BRK’s EPS rose by 87.7% year-to-date, from $10,119 to $18,994. Although its total revenue suffered a minor slump of 3%, BRK’s net income from investments and derivatives increased by an impressive 189.1% YoY, from $10.9 billion to $31.5 billion.
With all that said, it would be wise to consider would be the impact of Warren Buffet’s (90) and Charlie Munger’s (97) departures. Moreover, Buffet’s major investments in the last decade, in IBM, Occidental Petroleum and Kraft Heinz, didn’t exactly pan out as he expected. Nonetheless, Buffet’s post-death plan to sell his company stake, of which he owns 15%, may outweigh the reputational hit the company will likely endure after his passing.
Do you emphasize blue-chip stocks in your portfolio? For example, $1 in BRK.A in 1965 may yield 140 times ROI today, but only a fraction of that yield can be achieved now. Let us know in the comments below.
Disclosure: Tim Fries has no positions in any of the stocks mentioned, and has no plans to initiate any positions within the 72 hours following the publishing of this article. This article expresses the opinions of Tim Fries. Tokenist Media LLC has no position in any of the stocks mentioned, and does not plan to initiate any positions within 72 hours of the publishing of this article. Please consult our website policy for more information.