In this article, we will explore the 8 undervalued insurance stocks to invest in.
The State of the US Insurance Market: What Investors Need to Know
The insurance industry is currently facing significant challenges, particularly in regions prone to extreme weather events. Recent hurricanes, including Helene and Milton, have caused substantial damage in Florida, leading to billions in insurance losses.
Florida has faced significant challenges in its insurance market due to the impact of 4 major hurricanes in the past 4 years. On October 17, Reuters reported that homeowners contacted by Reuters in areas including both Florida coasts and the Keys are increasingly worried about rising premiums and the possibility of losing their insurance coverage altogether. Average homeowner premiums in Florida surged nearly 60% from 2019 to 2023. The state-backed insurer, Citizens Property Insurance Corp., has seen its policies increase from about 1.14 million at the end of 2022 to over 1.2 million as of June 2024, indicating a growing reliance on this insurer of last resort.
Analysts and experts predict that the recent back-to-back hurricanes, Helene and Milton, will further worsen the situation. Analysts warn that these storms will likely lead to even higher insurance costs and stricter coverage exclusions. Marc Ragin, an associate professor of risk management and insurance at the Terry College of Business at the University of Georgia, expressed concerns that insurers may become hesitant to continue offering policies in Florida due to the increasing frequency of severe weather events. As a result, many homeowners are left feeling anxious about their insurance options and financial security.
Ken Gregg, CEO of Orion180, told Reuters that the hope for a softer insurance market has vanished following Helene and Milton. Brian Schneider, senior director of insurance at Fitch Ratings, noted that price increases from reinsurers are forcing primary insurance companies to raise their rates as well. Despite these challenges, some private insurers remain committed to the Florida market, but homeowners continue to feel the pressure as they navigate an uncertain insurance landscape.
Resilience of the Insurance Market
Overall, the US insurance industry is proving resilient in the face of adversity. According to Mordor Intelligence, the US life and non-life insurance market’s size in terms of net written premiums was valued at $2.02 trillion in 2024. Looking forward, the market is expected to grow at a compound annual growth rate (CAGR) of 6.95% during 2024-2029 to reach $2.83 trillion by the end of the forecast period.
The insurance market is experiencing significant growth driven by several key trends that enhance its resilience despite facing catastrophic events. One of the primary factors is the rapid digital transformation within the industry, which has improved operational efficiency and customer engagement. Insurers are increasingly adopting technologies like artificial intelligence (AI) and big data analytics to streamline processes, personalize offerings, and enhance risk assessment.
Here’s a short excerpt from our article “7 Hot Insurance Stocks To Buy Right Now” that discusses this in more detail:
“Advancements in artificial intelligence (AI) continue to revolutionize how insurers assess risk and manage claims. AI technologies enable better data analysis and faster decision-making processes, which can enhance customer service and operational efficiency.
On October 22, CNBC reported that Near Space Labs, a Brooklyn, New York-based startup, has developed innovative technology to enhance the insurance claims process following natural disasters like hurricanes Helene and Milton. Their invention, called “Swifts,” consists of AI-enabled cameras mounted on weather balloons that fly at altitudes higher than airplanes. This allows them to capture high-resolution images over vast areas quickly, significantly speeding up damage assessments from weeks to just days. CEO Rema Matevosyan highlighted that their technology can gather data equivalent to what 800,000 drones would capture in one flight. The company has already conducted over 1,000 missions and is scaling operations to respond immediately to climate-related disasters, aiming to provide insurance companies with timely information for risk analysis and claims processing.”
Overall, these trends indicate that the insurance market is poised for growth and capable of withstanding challenges, making it an attractive sector for investors.
With this background in mind, let’s take a look at the 8 undervalued insurance stocks to invest in.
An insurance agent at their desk consulting a customer about property & casualty insurance.
Methodology
To compile our list of the 8 undervalued insurance stocks to invest in, we used the Finviz and Yahoo stock screeners to find the largest insurance companies. We also reviewed our own rankings and consulted various online resources.
From an initial pool of over 30 insurance stocks, we focused on those trading at under 15 times their forward earnings as of October 25. We further narrowed down our selection by looking for insurance stocks expected to show positive earnings growth this year.
Next, we focused on the top 8 stocks most favored by institutional investors and ranked the best insurance stocks based on hedge fund holdings. Data for the hedge fund sentiment surrounding each stock was taken from Insider Monkey’s database of 912 elite hedge funds. The 8 undervalued insurance stocks to invest in are ranked below in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Undervalued Insurance Stocks To Invest In
8. Arch Capital Group Ltd. (NASDAQ:ACGL)
Forward P/E: 11.39
Earnings Growth: 7.00%
Number of Hedge Fund Holders: 37
Arch Capital Group Ltd. (NASDAQ:ACGL) is a Bermuda-exempted company that provides insurance, reinsurance, and mortgage insurance services on a worldwide basis.
Strategically, the company has been active in expanding its operations through acquisitions. In the second quarter of 2024, the company completed the acquisition of RMIC Companies and its subsidiaries to enhance its mortgage insurance business. Additionally, on August 1, Arch Capital Group Ltd. (NASDAQ:ACGL) reported that Arch Insurance North America acquired the U.S. MidCorp and Entertainment insurance businesses from Allianz, expected to strengthen its middle-market offerings significantly.
In the second quarter of 2024, Arch Capital Group Ltd. (NASDAQ:ACGL) reported strong financial results, showcasing the effectiveness of its strategies. In Q2 2024, the combined underwriting income from its Reinsurance and Insurance segments reached $475 million, supported by more than $5 billion in gross premiums. Notably, the Reinsurance segment alone generated $366 million in underwriting income, demonstrating resilience despite facing increased catastrophic events. This performance reflects the company’s robust risk management practices and solid market positioning.
The Insurance segment also contributed $109 million in underwriting income with a 7% rise in net written premiums compared to the second quarter of 2023. Furthermore, the Mortgage segment experienced impressive growth, generating $287 million in underwriting income and increasing new insurance written by 12% year-over-year in the US. This diversified performance across segments underscores Arch Capital Group Ltd.’s (NASDAQ:ACGL) ability to leverage various market opportunities.
With a compound annual growth rate (CAGR) of 19% in revenue and 33% in net income over the past five years, Arch Capital Group Ltd. (NASDAQ:ACGL) stands out as one of the best insurance stocks to buy.
Arch Capital Group Ltd.’s (NASDAQ:ACGL) robust financial performance, strategic acquisitions, and strong market presence make it a compelling choice for investors looking for solid growth potential in the insurance sector.
According to the Q2 data from Insider Monkey, which covers over 900 hedge funds, 37 hedge funds owned stakes in ACGL in the second quarter of 2024. Baron Funds stated the following regarding Arch Capital Group Ltd. (NASDAQ:ACGL) in its Q2 2024 investor letter:
“Specialty insurer Arch Capital Group Ltd. (NASDAQ:ACGL) contributed to performance after reporting positive financial results that exceeded Street expectations. Operating ROE was 21% in the first quarter, and book value per share rose 40% due to strong underwriting profitability and the establishment of a deferred tax asset at the end of 2023. Favorable conditions persist in the P&C insurance market with strong growth and attractive returns despite signs of increasing competition. We continue to own the stock due to Arch’s capable management team and our expectation of significant growth in earnings and book value.”
7. The Travelers Companies Inc. (NYSE:TRV)
Forward P/E: 11.72
Earnings Growth: 44.20%
Number of Hedge Fund Holders: 38
The Travelers Companies Inc. (NYSE:TRV) is a leading American insurance provider that ranks among the best insurance stocks to buy. As one of the largest writers of commercial property casualty and personal insurance in the US, the company offers a comprehensive range of coverage options for auto, home, and business insurance. Outside of the US, The Travelers Companies Inc. (NYSE:TRV) company also has a strong market presence in Canada, the UK, and Ireland.
The company recently showcased its commitment to customer service, particularly in managing claims after hurricanes Helene and Milton. In its Q3 2024 earnings call, the management highlighted that The Travelers Companies Inc. (NYSE:TRV) activated its national catastrophe center in Hartford, deploying hundreds of claims professionals to assist affected customers.
Financially, The Travelers Companies Inc. (NYSE:TRV) reported impressive results for the third quarter of 2024. The company achieved a net income of $1.26 billion, or $5.42 per diluted share, a significant increase from $404 million in the same quarter last year. Core income also rose to $1.218 billion, driven by higher underwriting gains and net investment income despite facing some catastrophe losses. Notably, net written premiums reached a record $11.3 billion, reflecting an 8% increase from the previous year.
The company’s Business Insurance segment also performed well as it grew by 9% year-over-year, generating $5.5 billion in net written premiums in Q3 2024. The Bond & Specialty Insurance segment experienced a 7% increase to $1.1 billion in premiums. Personal Insurance saw similar growth, with net written premiums rising by 7% to $4.7 billion, driven by strong renewals in homeowners insurance.
Over the past 5 years, The Travelers Companies Inc. (NYSE:TRV) has grown its revenue at a compound annual growth rate (CAGR) of 7%, while its net income has increased at a CAGR of 13% during the same period.
TRV can be considered cheap at current levels. It is trading at 11.72 times its forward earnings. The Travelers Companies Inc. (NYSE:TRV) is anticipated to experience 44.20% earnings growth this year.
According to Insider Monkey’s database of over 900 hedge funds, 38 hedge funds held stakes in The Travelers Companies Inc. (NYSE:TRV) in Q2 2024. This brings TRV to the 7th spot on our list of the undervalued insurance stocks to invest in.