In this article we take a look at 5 best insurance stocks to buy now. If you want to read a detailed analysis of the insurance industry, including Warren Buffett’s investment rationale for insurance stocks, click to read 10 Best Insurance Stocks to Buy Now.
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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:
“Description
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.
Good Business
• 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.
Valuation
• 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%.
Management
• 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.
Investment Thesis
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.”
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.”
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.
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.
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.”
Please also see 10 Best Value Stocks To Buy Now and Top 10 Dividend Stocks That Pay Monthly.
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Disclosure: No positions.
