In this piece we will take a look at the best insurance stocks to buy as homeowner’s insurance rates are skyrocketing.
Insurance is one of Warren Buffett’s favorite businesses. So much insurance is the single largest revenue contributor to Buffett’s firm, Berkshire Hathaway. Its first quarter SEC filings show that Berkshire earned $89.8 billion in revenue during Q1 2024, out of which its insurance underwriting and investment income accounted for 27% or $24.6 billion in revenue.
Seems like insurance is quite a lucrative business, and even though it sounds boring, insurance is also one of the most dynamic businesses in today’s environment. This is because of climate change, which has led to a growing number of floods, tornadoes, and hurricanes in the US. In fact, climate change along with a slew of other reasons has led to soaring home insurance costs since the coronavirus pandemic, according to data from the Insurance Information Institute. Between 2020 and 2022, replacement costs for homeowners insurance have soared by 55% because of increasing natural disasters and high inflation which has made construction materials expensive. In fact, cumulative insured losses from hurricanes and convective storms sat below $500 (in 2024 dollars) in 1990. As of 2023 end, these had jumped to $5,984 and $5,761, respectively.
These rising costs have also hit the home insurance industry hard. Insurance companies’ profitability is measured through the combined ratio, which is the sum of an insurer’s costs and payouts divided by the premiums collected. Naturally, a value below 100 reflects profitability, and from 2020 to 2023, the net combined ratio which also accounts for reinsurance sat at 107.3%, 103.4%, 104.7%, and 110.9% for each of the years, respectively. The value for 2023 was the worst since 2011, and it came at a time when home insurers increased their premiums by 12% – for the highest increase in 15 years. Since 2012 and 2021, the average premiums have grown by $1,034 to $1,411.
While these rising home insurance premiums reflect the higher cost of doing business, the real picture is more complicated. Like inflation, where prices always go up and never come down, the same is the case for insurance premiums as well. While insurance premiums rose in the Gulf Area during Katrina, costs were at least $55 billion, and at least nine insurers went bankrupt, business was booming the year after in 2006. In 2006, home insurers bathed in profits, with data from A.M. Best outlining that the property and casualty industry raked in $68 billion for a 39% annual growth. For some, like the 21st largest insurance company in the US by assets, their profits were a record high (it earned $5 billion). The same firm had an earnings per share of $50 early during the coronavirus pandemic and then it became a loss making entity in 2022. Naturally, regulators allowed it to increase its prices by 30%, 20%, and 14.6% in California, New Jersey, and New York. Now, Wall Street has penciled in an earnings per share of $15 for this insurance company in 2024 and expects it to grow to more than $20 in the next couple of years.
Fast forwarding to the current day, the effects of climate change and inflation can even translate into higher home prices. After fires raged through California last year, several home insurance companies stopped taking new policies. This leads to higher premiums and ends up affecting home buyers hard since they factor in the insurance cost at the end of their buying decision. And while homeowner and home buying costs might rise due to the tighter insurance market, the industry continued to struggle in 2023.
A.M. Best’s latest data reveals that 2023 was the worst year for the homeowner’s insurance industry for the worst loss this century. The sector suffered from a whopping $15.2 billion underwriting loss last year, and the rating agency didn’t mince its words when it simply stated that the reason behind the losses is simply a higher number of Americans moving to the disaster prone areas of the South and the West. A.M. Best outlines that while the US population grew by 7.4% between 2010 and 2020, the population in the South and the West jumped by 10.2% and 9.2%, respectively. The scale of these losses meant that in 2023, the combined ratio for homeowner insurance was higher than 100 in 17 American states. If you thought that these troubles were temporary, A.M. Best was also careful to mention that “a return to underwriting profitability for the segment over the near term is unlikely.”
The next question to ask when analyzing the state of the home insurance industry in the US in 2024 is, which states are experiencing the most trouble? On this front, the New York Times provides some insight. Its research shows that instead of 17, 18 American states had a combined ratio greater than 100 last year. Leading the pack was Hawaii, which is unsurprising given that the claims from historic wildfire losses exceeded a whopping $3.3 billion – for another instance of climate related disasters disrupting the insurance industry. After Hawaii, one of the worst performing regions was Arkansas. The Bear State is notable not only for its combined ratio being greater than 100 in 2023 but also for having a near similar ratio in 2022. Severe weather events, including tornadoes, are also a key reason for the struggles that the Arkansas insurance industry is facing.
Combining the difficulties that home insurance companies are facing with the shifting weather patterns, it’s also relevant to check whether the same states that give insurers trouble are also witnessing an increase in homeowner insurance costs. According to data from Insurify, not only have homeowners insurance premiums jumped by 20% over the past two years to sit at $2,377 annually on average, but they will grow by an added 6% this year. Within this growth, Louisiana is expected to lead the pack and see its premiums jump by an eye watering 23% this year.
So, as home insurance faces a changing climate (figuratively and literally) we decided to see which home insurance stocks are finding favor from analysts.
Our Methodology
For our list of the best home insurance stocks, we ranked property and casualty, diversified, and specialty home 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 home 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. Kinsale Capital Group, Inc. (NYSE:KNSL)
Number of Hedge Fund Investors in Q1 2024: 30
Kinsale Capital Group, Inc. (NYSE:KNSL) is what is termed an excess and surplus lines insurance company. This means that it is a high risk firm that typically offers lines that most insurance companies don’t cover either due to high risk or high costs. Kinsale Capital Group, Inc. (NYSE:KNSL) also offers homeowners insurance, but it limits its coverage to houses that are valued at $1 million or above. Some of the properties that it covers include mansions, ranches, and historic properties. The nature of its market means that Kinsale Capital Group, Inc. (NYSE:KNSL) can enjoy hefty premiums and low competition. On the flip side, it also has to ensure that reserves are adequate to meet any claims, which can be more severe than the claims general homeowner insurance companies have to pay out. Additionally, Kinsale Capital Group, Inc. (NYSE:KNSL) could also benefit from the impact of climate on the homeowner insurance industry that we discussed in the introduction to this piece. If more companies stop covering homeowners in high risk areas, Kinsale Capital Group, Inc. (NYSE:KNSL) could swoop in, offer high premiums, grow its revenue, and increase market share. It also enjoys a considerable competitive advantage in its niche, courtesy of a technology platform which enables it to offer quotes to customers within a day.
Baron Funds mentioned Kinsale Capital Group, Inc. (NYSE:KNSL) in its Q1 2024 investor letter. Here is what the firm said:
“Specialty insurer Kinsale Capital Group, Inc. reported financial results that exceeded Street forecasts. After a slowdown in the prior quarter, gross written premiums grew 34% and EPS grew 49% with a record-high underwriting margin. Market conditions remain favorable with rising premium rates and more business shifting from the standard market to the excess and surplus lines market where Kinsale operates. In addition, insurance stocks broadly rebounded from last quarter’s pullback as interest rates stabilized. We remain bullish on the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.”
9. First American Financial Corporation (NYSE:FAF)
Number of Hedge Fund Investors in Q1 2024: 33
First American Financial Corporation (NYSE:FAF) is a specialty insurance company that deals primarily with title insurance, home warranties, and associated products. This undiversified business model means that the firm is dependent directly on the housing industry for its performance. If builders build more houses and rates are low, then First American Financial Corporation (NYSE:FAF) benefits from more home purchases and vice versa. Consequently, it’s unsurprising that the stock is down 3.57% year to date as the US housing industry continues to struggle with sales down 2.4% year over year in May. First American Financial Corporation (NYSE:FAF) could benefit from lower rates and falling inflation which creates more room for home buyers to splurge on new houses. This is particularly true due to the firm’s unique business model because of its First American Trust subsidiary. This subsidiary is a trust for customer escrow funds during the home buying process, and it enables First American Financial Corporation (NYSE:FAF) to earn money off of deposits. However, regulators are also tightening the screws on the title insurance industry, and any regulations could spell trouble.
First American Financial Corporation (NYSE:FAF)’s management commented on the regulatory risks during the Q2 2024 earnings call. Here is what it said:
“There’s probably not a lot of update, I think, from the last quarter. I mean, on the Title Waiver program, the Fannie, request for proposal is out. I think there’s been a lot of push back on the — from legislators, state attorneys general and the like. So, I think there’s a lot of political pressure coming down on Fannie’s regulator, in particular. But I think it remains to be seen there. With the CFPB, their request for information on whether or not they should prohibit lenders from passing on the cost of title insurance. I mean that RFI is out. Our trade group and other trade groups are responding. On that, I’ll say our opinion is that probably bad for consumers. There have been a lot of push over the years to increase transparency and now this will decrease transparency to consumers.
And I think it will probably increase cost to consumers, but it feels like the CFPB wants to push ahead. But at the end of the day, it’s not going to necessarily be bad for us. In fact, it might actually be good for us. I mean, we have a strong centralized lender program that should enable us to perform well in the event that the CFPB goes in the direction, I think they want to go. So as always, we’re watching these things carefully. And — but it’s evolving still.”