In this piece, we will take a look at the best car insurance stocks to buy as car insurance rates skyrocketing.
Ever since the coronavirus pandemic, a wide variety of industries, ranging from technology to energy and finance have been dealing with a changed economic environment. When it comes to auto insurance, the immediate aftermath of the pandemic’s outbreak was a boon for auto insurance companies. It saw them bathe in money as the number of drivers on the roads significantly dropped and they had fewer claims to process. Data from the Consumer Federation of America shows that in 2020, auto insurers earned a whopping $29 billion in profit at a time when their premium claims percentage dropped to 56.1% from the average of 67.4% between 2016 and 2019.
Yet, just like their peers in the homeowner insurance industry would find out, the rising inflation after the pandemic made the next year one of the hardest for the auto insurance industry. Along with economic inflation, ‘social inflation’ which is a term that the industry uses to describe a harsh view of companies among jurors, would disrupt the auto insurance industry. After the pandemic, used car prices jumped by as much as 40%, and since insurance premium increases require regulator approval, the companies could not increase their prices to keep pace.
In fact, in 2021, all of the top auto insurers in the US saw their loss ratios rise. A loss ratio measures the ratio of payouts to premiums earned and a lower ratio is naturally preferred. According to the S&P, some insurers whose ratios were as low as 49.8% and 51.7% in 2020 saw these jump by tens of percentage points to 60.7% and 67.3%. For some insurers, these were the worst ratios since at least 2017. As they struggled to raise premiums, with some regions such as California having two year moratoriums on rate increases, 2022 ended up being the worst year on record for the auto insurance industry since 2000. Another key metric to evaluate insurance companies is the combined ratio, which adds payouts to expenses and divides them by premiums. A value lower than 100 indicates profitability and vice versa.
As per the S&P’s data, the net combined ratio for US private auto insurers was 111.8% in 2022 as it crossed the 2000 high of 110.4% by more than a percentage point. Their loss ratio also further deteriorated. From its 2021 value of 67.6%, the loss ratio jumped by 12 percentage points to sit at 79.8% the next year. Auto insurers responded to this challenge by cutting their costs, as their expense ratio dropped to 21.7% in 2022.
Just as the auto insurance industry’s fate rapidly changed between 2020 and 2021/2022, the same happened in 2023. According to the Labor Department’s data for May 2023, auto insurance premiums shot up by 17.1% over the past 12 months, with rising medical bills, claims, and repair costs coupled with a dropping auto inventory contributing to the jump. This wasn’t the end for soaring auto insurance costs, with the March 2024 Consumer Price Index showing that car insurance premiums were 22.2% more expensive in America. This was more than 6x the inflation rate of 3.5%, and the pricier auto insurance costs were due to the usual culprits of repair and repair and maintenance costs. These surged by 11.6% and 8.2%, respectively, during the same time period.
At the same time, since the world opened itself up again after the coronavirus pandemic, car accidents have also grown. These are also to blame for high car insurance costs since more accidents mean greater payout frequency, and as the insurers would argue, social inflation contributes to higher payout severity as well. These trends were already in play last year, with crashes and claim severity jumping by 14% and 36% in July 2023 according to the American Property Casualty Insurance Association (APCIA).
In addition to inflation, accidents, and severity, other causes are also responsible for soaring auto insurance costs in America. In a report that covered 34 cities, the Council on Criminal Justice revealed that car thefts had grown by 29%. These figures are corroborated by the National Crime Insurance Bureau, which believes that 2023 was the second consecutive year for more than one million car thefts in the US. Finally, auto insurers, like homeowner insurers, are also suffering from more climate catastrophes. Hurricanes, floods, and tornadoes all lead to property damage, and if they increase in frequency, then auto insurers will naturally increase their premiums to create room for the rising payouts.
With these details in mind, let’s take a look at the top car insurance stocks to buy.
Our Methodology
For our list of the best auto insurance stocks, we ranked property and casualty, diversified, and specialty insurance companies by the number of hedge funds that had bought their shares in Q1 2024. The specialty and diversified firms were chosen to ensure completeness, and each firm was analyzed to ensure that it offered auto insurance.
Why are we interested in the stocks that hedge funds pile into? 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).
10. Assurant, Inc. (NYSE:AIZ)
Number of Hedge Fund Investors in Q1 2024: 26
Assurant, Inc. (NYSE:AIZ) is a Georgia based insurance company that provides auto insurance through its products such as Assurant Vehicle Care. Its housing insurance division is larger than the auto insurance division, which means that the stock is tied more to its performance. Key factors that influence Assurant, Inc. (NYSE:AIZ)’s share price include catastrophic events in the regions in which it provides home insurance. However, even though Assurant, Inc. (NYSE:AIZ) has a sizeable home insurance division, its auto insurance business is also larger than several pure play auto insurance companies. The auto insurance division provides coverage to more than 53 million vehicles worldwide, and Assurant, Inc. (NYSE:AIZ) has been providing coverage for cars for more than 50 years. Additionally, easing global inflationary pressures for vehicle repairs should prove beneficial for the stock. Similarly, lower interest rates that lead to more car sales can translate into higher policy sales for Assurant, Inc. (NYSE:AIZ).
Assurant, Inc. (NYSE:AIZ) has also been increasing its auto policy rates which could lead to lower coverage ratios if inflation falls. The firm’s management commented on the auto business during the Q1 2024 earnings call where it shared:
“Moving to global automotive, similar to others in the industry first quarter results reflected persistent inflation impacts to vehicle parts and labor repair costs. We’ve continued to take actions to address elevated inflation including implementing additional rate increases in the first quarter that build upon those taken over the past 18 months while also strengthening and enhancing our claims adjudication process.
For 2024, we expect auto earnings to be flat. Investment income growth and disciplined expense management efforts are expected to be offset by continued claims inflation. We remain confident in the long-term growth prospects of our auto business. Over the next several years, we expect rate actions to provide a tailwind for the business with the pace and timing of earnings growth dependent on broader market trends”
9. The Hartford Financial Services Group, Inc. (NYSE:HIG)
Number of Hedge Fund Investors in Q1 2024: 26
The Hartford Financial Services Group, Inc. (NYSE:HIG) is a sizeable and diversified insurance company that provides automobile insurance among other businesses such as casualty and workers’ compensation. Like other insurance companies, The Hartford Financial Services Group, Inc. (NYSE:HIG) benefits when its higher premiums allow it to counter inflationary trends and rising claims even when prices fall. Similarly, a diversified business model allows The Hartford Financial Services Group, Inc. (NYSE:HIG) to easily stop coverage in areas where it is suffering from high claims due to natural disasters. Its shares are up by 33% year to date, driven by the fact that The Hartford Financial Services Group, Inc. (NYSE:HIG) has benefited from high premium increases. A diversified business also means that the stock can benefit from an uptick in any one business area. A large reason behind The Hartford Financial Services Group, Inc. (NYSE:HIG)’s year to date share price growth has been an acceleration in its insurance written to businesses. During Q2, this segment had a top line growth of 14% and a combined ratio of 87.4 – for the best of both worlds.
However, The Hartford Financial Services Group, Inc. (NYSE:HIG)’s auto insurance business has struggled as of late. Here’s what was on management’s mind during the Q2 2024 earnings call:
“In auto, we achieved written pricing increases of 23.5% and earned pricing increases of 22.1%. In homeowners, written pricing increases were 14.9% for the quarter and 14.6% on an earned basis. In Personal Lines, the underlying combined ratio of 96.7 improved by five points from the prior year. Homeowners had another strong quarter with an underlying combined ratio of 77.8. We are very pleased with the improvement we are seeing in our auto results.
Through June 30th, our underlying combined ratio of 104.7 was in line with our expectations and is 3.8 points lower than the prior year period, almost entirely due to improvement in the loss ratio. We remain on track to achieve the five to six-point full-year improvement in the auto underlying loss ratio as we have previously discussed.”