With so much uncertainty in today’s world, it pays to have a little insurance. And it just so happens that insurance stocks look very attractive today.
At its most basic level, insurance involves transferring risk from one party to another and charging a fee for that service. This is true whether it is property insurance, business interruption, end of life or niche risks. To complicate matters, there is reinsurance, basically insurance for insurance companies and brokers that bridge the gap between insurers and customers.
The thing is, many insurers don’t make much money selling insurance. Claims and costs of running a business often exceed premium income in a typical year. To make up the difference, insurers invest capital in large and diversified portfolios of government and corporate bonds, common and preferred stocks, mortgage loans and securities, debt and real estate equity, and other return-generating investments.
This makes insurers’ results sensitive not only to natural disasters and car crashes, but also to financial markets. A particularly bad year of natural or man-made disasters that result in large claims payouts, or a losing year for the markets, can reduce capital. This is usually followed by a so-called hard market of rising premiums as insurers recoup their surplus.
The property and casualty insurance industry has been in a tough market for several years, and reinsurance has just entered it. Last year was tough for stocks and bonds, as insured losses in the industry topped $100 billion globally for just the fifth time in history, according to Deutsche Bank analyst Cave Montazeri. This year is on track to exceed that figure – we had hurricane damage in Florida, a devastating earthquake in Turkey and wildfires in Maui, among other disasters.
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Next year should bring stronger price increases, analysts say, favoring firms with the strongest capital and ability to self-fund growth. Here are six insurance stocks to consider.
Arch Capital Group
Established in 2001, specialty underwriter Arch Capital Group has a reputation for conservative underwriting practices that generate superior returns. This has been helped by the fact that it has become the largest provider of mortgage insurance in the world following the acquisition of American International Group
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(ticker: AIG) division in 2016. That business throws off enough free cash flow that Arch can fund growth on its own in today’s tough market — versus a pure reinsurer that might have to raise expensive capital elsewhere. “They allocate capital really well,” says Haruki Toyama, manager of the
Madison Mid Cap
fund (GTSGX), which counts Arch as its largest holding. “They gain over time by taking on more when prices are attractive and less when they are not.”
Chub
Like Arch Capital, property and casualty insurer Chubb has a strong track record of quality underwriting in both soft and hard insurance markets. Its return on investment is also rising. At the end of the second quarter, 86% of the insurer’s $117 billion portfolio was in bonds with an average duration of nearly five years. As he transfers the holdings in 2024, he will reinvest them in higher-yielding securities. In the longer term, Chubb should enjoy a growth boost from its Asian insurance business. Despite accounting for 40% of global gross domestic product, Asia is responsible for only 26% of global insurance, a gap that should narrow over time, says Deutsche Bank’s Montazeri. He has a $269 price target on Chubb stock, up 30% from recent levels.
Everest Group
Reinsurer Everest Group
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the stock looks more than ready to climb the mountain. Wall Street analysts forecast earnings-per-share growth of nearly 90% for the company this year, driven by stronger pricing, followed by 15% in 2024. “This is really a tough market for a generation,” Chief Financial Officer Mark Kociancic said on earnings call earlier this year. Wells Fargo analyst Elise Greenspan points to several favorable catalysts for Everest Group stock: She expects strong third-quarter results in late October, new long-term financial targets at the Nov. 14 investor day and positive pricing updates in January after reinsurance resumes to start the year. Greenspan has a $452 price target on Everest shares, a 16% upside.
WR Berkeley
WR Berkeley
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with partners such as Markel Group (MKL) and Kinsale Capital Group (KNSL), plays in the “excess and surplus”, or E&S, part of the insurance market, offering bespoke insurance lines for more complex risks. This can mean insuring everything from racehorses to summer camps to growing cannabis. Due to the idiosyncratic nature of their policies, E&S insurers’ underwriting profit margins are far superior to those of standard lines of insurance. WR Berkley stock is attractive right now, trading at a significant discount to its historical average price-to-earnings and price-to-book ratios. Analysts are forecasting 20% earnings per share growth in 2024 on average.
Metlife
Life insurers tend to be more sensitive to fluctuations in financial markets than others, resulting in more volatile results and lower valuations. Take MetLife
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which trades for less than seven times expected 2024 earnings. While the uncertain outlook for stocks and bonds may continue to weigh on the ratio, MetLife has other ways to win. The insurer has significantly simplified its portfolio in recent years by spinning off its low-margin annuities unit as Brighthouse Financial (BHF) and selling other divisions. Now focused on employee benefit programs and other traditional insurance, MetLife has been increasing free cash flow and ramping up its stock buyback plans — a good move when the stock is so cheap.
Arthur J. Gallagher
Insurance brokers like Arthur J. Gallagher
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are intermediaries between insurers and companies that want to manage their risks. It is a capital-light business that tends to grow at the rate of nominal gross domestic product. In recent years, insurance brokers have evolved into “professional services firms,” adding a variety of offerings in healthcare, human resources, and talent consulting. Gallagher is best positioned to take advantage of today’s tough insurance pricing market, Deutsche Bank’s Montazeri says, with 85% of its sales still coming from insurance brokerage. Higher premiums in a firm market mean bigger commissions for Gallagher. Its price target of $277 suggests 19% upside.
Write to Nicholas Jasinski at [email protected]
