In this article we discuss the 10 best insurance stocks to buy now. We analyze the reasons why Warren Buffett loves insurance stocks, and why you should invest in the industry, in addition to talking about the top insurance stocks for 2021 and beyond. You can skip this discussion and read 5 Best Insurance Stocks to Buy Now.
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.
Warren Buffett of Berkshire Hathaway
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 (see the details here). 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.”
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Disclosure: No positions. 10 Best Insurance Stocks To Buy Now is originally published at Insider Monkey.
