Billionaire Warren Buffett is known as one of the greatest investors in the world. When talking about Warren Buffett, we focus on his stock portfolio, but we often overlook one important sector that Buffett’s Berkshire Hathaway is thriving in and which is one of the cornerstones of the company – insurance. Berkshire Hathaway has three insurance subsidiaries: GEICO, General Re, and Berkshire Hathaway Reinsurance, as well as several smaller companies. There is one main reason why Warren Buffett likes the insurance business, the float, or the money that insurance companies collect in advance to be paid later as claims. These money can be used for investment purposes and generate returns for insurance companies.
Insurance is one of those things that people don’t like to think about. You pay premiums every month and thank all the deities you can think about in case of an event that causes you a big loss that can be covered by an insurance plan. Essentially, insurance companies spread the risk of catastrophic events over a large population. Millions of people have car insurance and pay small monthly premiums, yet just thousands actually get into accidents and need money from their insurance companies. In rare occasions there are major catastrophic events like hurricanes or fires that cause billions of dollars in damage, but such events are infrequent and most people that pay insurance premiums almost never need large claims. Therefore, big insurance companies that have many paying customers and few catastrophic events, end up with a lot of money that they can in turn use to generate value for their shareholders.
In this way, insurance stocks are a good addition to any portfolio, even though the industry is not as excited as technology or biotech. Most insurance companies, especially, the big ones, would generate stable returns over the long-run, since people rarely change their insurance providers and these companies have to be around for a very long time. You will trade off some potential short-term jumps in stock price that are often seen among tech or healthcare stocks, but you will have some peace of mind by investing in the right insurance company. Another aspect that makes insurance companies more appealing in the current economic environment are the rising interest rates. Since most insurance companies have very conservative portfolios, they tend to invest large portions of their float in bonds, so higher yields would result in higher returns.
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But how do you pick the right insurance stocks for you to invest in? There are many factors to consider, including the size of the company, how many customers it has, what kind of insurance it provides, how it invests its capital, dividends and so on. Therefore, sorting through all insurance companies can be a tedious process. We can help you narrow down your list of choices by presenting five insurance stocks that are popular among hedge funds. Our research has shown that consensus picks among smart money investors tend to perform better than others. Our own strategy, which focuses on most popular small-cap picks among 100 best-performing hedge funds has returned 74.4% since May 2014, outperforming the S&P 500 ETF (SPY) by more than 20 percentage points. You can take a look at the latest picks from our strategy by accessing our premium newsletters free of charge for 14 days.
In picking the most popular insurance stocks among hedge funds, we focused on those companies that saw an increase in the number of bullish investors during the last year. Therefore, we have skipped American International Group, Inc. (NYSE:AIG), which, even though is the most popular stock with 54 invested funds, also saw the number of investors with long positions decline by 20 last year and by 47 funds since the end of 2015. On the other hand, the companies that we will discuss on the next page, have attracted more smart money investors in the last couple of years.
In Travelers Companies Inc (NYSE:TRV), there were 36 funds holding shares at the end of 2017, down by two funds over the quarter, but up from 32 funds at the end of 2016 and 24 funds at the end of 2015. Travelers Companies Inc (NYSE:TRV)’s stock has gained 21% since the end of 2015 and currently has a dividend yield of 2.11%. In January, Travelers Companies Inc (NYSE:TRV) reported its fourth-quarter results, which included a core income of $2.28 per share, down from $3.20 a year earlier, but higher than expectations of $1.51. The company also registered a 6% increase in net written premiums to $6.424 billion and $601 million in pre-tax net investment income, down by 4% on the year due to lower returns in fixed income. In addition, in the fourth quarter, Travelers Companies Inc (NYSE:TRV) registered a combined ratio of 95.5%, up by 5.5 percentage points over the year due to higher catastrophe losses. The combined ratio measures the profitability of an insurance company, with a figure below 100% indicating that the company is paying less in claims and incurs expenses that it is collecting in premiums.
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Aon PLC (NYSE:AON) saw the number of bullish investors increase by three during the fourth quarter and by two during 2017 to 37 funds that collectively amassed over 8% of the company’s outstanding stock at the end of the year. Moreover, at the end of 2015, there were 28 funds holding shares of Aon PLC (NYSE:AON). Aon PLC (NYSE:AON) is not exactly an insurance company since it offers insurance and reinsurance brokerage services and risk, retirement and health solutions. Last year Aon PLC (NYSE:AON) has been making some changes to its portfolio. In May, it sold its benefits administration and human resources outsourcing division to Blackstone Group for $4.8 billion. In September, it acquired real estate investment management firm Townsend Group from Colony NorthStar for $475 million and in November it purchased dutch insurance broker Unirobe Meeùs Groep from Aegon for $365 million. Recently, Aon PLC (NYSE:AON) has raised its dividend to $0.40 from $0.36, which gives its stock a yield of 1.03%..
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Even though the number of investors long Allstate Corp (NYSE:ALL) declined by five to 37 during the fourth quarter, it jumped from 31 funds and 28 funds that held shares at the end of 2016 and 2015, respectively. In March, Uber partnered with four insurance providers including Allstate Corp (NYSE:ALL), which will be servicing the company in Illinois, Wisconsin and New Jersey. In February, Allstate Corp (NYSE:ALL) reported its results for the fourth quarter, with EPS of $2.09 beating the consensus estimate by $0.56 and revenue from property and casualty insurance premiums of $8.20 billion higher than the expected $8.09 billion. Allstate Corp (NYSE:ALL) also reported a consolidated revenue of 9.84 billion, up by 6% on the year, which reflects growth in premiums and net investment income. In addition, Allstate Corp (NYSE:ALL) registered a combined ratio of 91% in the fourth quarter, slightly higher than 89.7% a year earlier.
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At the end of 2017, there were 38 funds in our database long Athene Holding Ltd (NYSE:ATH), versus 39 funds a quarter earlier and 31 funds at the end of the previous year. Athene Holding Ltd (NYSE:ATH), which is backed by private equity firm Apollo Global Management, went public in December 2016, becoming the largest financial IPO that year. Athene Holding Ltd (NYSE:ATH) provides retirement savings products with almost $100 billion in assets. Last year, Athene Holding Ltd (NYSE:ATH) saw its net income jump by 89% to $1.45 billion due to higher operating income driven by higher investment income. The company also saw its new deposits grow by 31% to $11.50 billion.
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Last but not least, Progressive Corp (NYSE:PGR) is the second most-popular insurance stock after American International Group. Heading into 2018, 41 funds amassed shares of the company, versus 42 funds a quarter earlier, 38 funds at the end of 2016 and just 23 funds at the end of 2015. Progressive Corp (NYSE:PGR) is another one of the four insurers that Uber partnered with last month and it is covering Florida, Texas, Colorado and Arizona. Also in March, Progressive Corp (NYSE:PGR) reported its results for February, which included EPS of $0.22, down from $0.23 a year earlier, while net premiums written and net premiums earned increased by 23% and 19% on the year to $2.70 billion and $2.20 billion, respectively. The company also registered a combined ratio of 87.8%, down by 2.6 points over the year and reported a 14% increase in the number of personal auto policies in force to 12.10 million and a 29% increase in property policies to 1.61 million.
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