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.”
8. Fidelity National Financial, Inc. (NYSE:FNF)
Number of Hedge Fund Investors in Q1 2024: 33
Fidelity National Financial, Inc. (NYSE:FNF) is another specialty insurance company that offers title insurance and home warranty products. While its business model is a bit more diversified because of the guaranty business, as a whole, Fidelity National Financial, Inc. (NYSE:FNF) continues to remain dependent on the health of the home building and mortgage industry. This means that any surprises on the earnings front will be heavily rewarded by investors as well. At the same time, due to the scale of its operations, Fidelity National Financial, Inc. (NYSE:FNF) relies on a large number of transactions to keep its margins low. If home inventory continues to remain low, then even if rates are low, the firm could struggle on the financial front unless it trims the belt and starts laying off employees. To help keep the shares stable, management could also announce stock repurchases that could create tailwinds for the shares.
Fidelity National Financial, Inc. (NYSE:FNF)’s guaranty business helps it weather any storm in the housing market. Here’s what management had to say about it during the Q1 2024 earnings call:
“F&G has profitably grown its assets under management before flow reinsurance to a record $58 billion at March 31. As demonstrated, F&G’s business performs well in a low rate environment and even better and higher rate environments, which provides a nice counterbalance for the title business. Their growth prospects are compelling and led to our board’s decision to invest $250 million in F&G during the first quarter, in exchange for a mandatory convertible preferred security. This will enable F&G to take advantage of the current opportunity to accelerate growth of its retained AUM. Overall, we are pleased with F&G’s performance, which continues to exceed our expectations and even more pleased that this performance is being recognized by the market as seen in F&G’s strong share price performance since its listing in December of 2022.
We believe that the growing value of F&G is beginning to be recognized in FNF’s shares as well. I would like to thank our employees for their outstanding efforts in delivering a solid start to the year, including another industry-leading performance despite the tough market.”
7. W. R. Berkley Corporation (NYSE:WRB)
Number of Hedge Fund Investors in Q1 2024: 36
W. R. Berkley Corporation (NYSE:WRB) is a property and casualty insurance company that focuses primarily on insuring high value and luxury homes. A Fortune 500 firm, it is one of the biggest commercial underwriters in the industry. Rising insurance premiums have served W. R. Berkley Corporation (NYSE:WRB) well, as its second quarter revenue jumped by 15% and was led by a 52% growth in its investment income which benefits from a high rate environment that has pushed bond yields higher. This also creates a double edge sword for W. R. Berkley Corporation (NYSE:WRB). While any potential fall in interest rates will lead to stock tailwinds, their impact on the income statement will be delayed. However, lower rates and potentially lower yields can cause near immediate impact on the investment income.
W. R. Berkley Corporation (NYSE:WRB)’s management shared its thoughts during the Q1 2024 earnings call on how it managed to deliver a profitable combined ratio despite higher payouts in the property market:
“Before I hand it to Rich, I guess perhaps stating the obvious, clearly an active quarter of frequency of what I would define as severity, but perhaps relatively modest severity on the property front.
From our perspective, it was an opportunity for this organization to differentiate itself as it does when there is severity on the property market front. And in spite of all the challenges, we were still able to deliver a 91% combined. I guess for those that subscribe to the [but for] (ph) club, it would be an 88%. But when we look at the goal of the exercise being to generate good risk-adjusted returns to build the book value, we are of the view that cats do count and so does net development. In our opinion, it’s not just about the steps forward that you take, it’s also about the steps backwards that you will avoid. And that is very much woven into how we approach the business on all fronts.”
6. The Travelers Companies, Inc. (NYSE:TRV)
Number of Hedge Fund Investors in Q1 2024: 40
The Travelers Companies, Inc. (NYSE:TRV) is one of the biggest insurance companies in America. It operates in the homeowner’s insurance industry through its Personals business division which offers automobile and homeowner insurance. Its diversified business model and scale means that the The Travelers Companies, Inc. (NYSE:TRV) has to ensure that it has adequate reserves to manage liabilities in a variety of different sectors. Apart from the homeowners’ insurance industry which has seen rising claims and costs due to climate change and inflation, the historic Crowdstrike outage in July and other similar events could impact The Travelers Companies, Inc. (NYSE:TRV) harder than other homeowner insurers due to its presence in the market. Additionally, the firm also has to ensure that its premiums are growing with or above the market, especially since any slowdown could make it struggle with reserves and increase investor worries of insolvency in case of a major calamity. These trends were also in play during July 2024, when The Travelers Companies, Inc. (NYSE:TRV)’s stock dipped by 7% after its Q2 results saw it earn $11.12 billion in premiums. While these marked a 7.7% annual growth, they missed analyst estimates of $11.24 billion.
During the earnings call, The Travelers Companies, Inc. (NYSE:TRV)’s management commented on its homeowners business division and shared:
“Production results in homeowners and other reflect our focus to manage growth, while improving profitability. Renewal premium change increased sequentially to 15.1%, reflecting higher rate change, while retention remains strong at 85%. We expect renewal premium change to remain at this level through year end. As we intended, new business and policies enforced declined, reflecting our efforts to thoughtfully deploy capacity. To sum up for the Personal Insurance segment overall, we’re pleased with our progress as we continue to deliver improved profitability. We’re confident that the actions we’ve taken and continue to take will result in a profitable growing portfolio of personalized business over time.”
5. Chubb Limited (NYSE:CB)
Number of Hedge Fund Investors in Q1 2024: 53
Chubb Limited (NYSE:CB) is another mega insurance company that provides homeowners insurance through its personal property and casualty business division. The diversified business means that Chubb Limited (NYSE:CB) struggles in some areas, such as agriculture which is currently facing pressures. Likewise, Chubb Limited (NYSE:CB) has exposure to the property market in the US and abroad, which means that it can benefit from high premiums and low catastrophe payouts in exUS regions even if US payouts are higher. Chubb Limited (NYSE:CB) also benefits from diversified rate increases, which means that it can earn investment income from higher premiums earned from some business divisions, even if its business is struggling in other regions. Yet, its scale also means that Chubb Limited (NYSE:CB) needs to keep significant reserves on hand to ensure liquidity in case of large scale disruptions.
Chubb Limited (NYSE:CB)’s shared pertinent insights on the impact of catastrophe on its property division during its Q2 2024 earnings call:
“Our middle market P&C business grew at 11%. Our E&S business grew at 8.7%. Our large-account business grew a little slower clip. Our financial line shrank, while P&C grew. I’ve gone through that where rates achieve a risk-adjusted return from everything we can tell, that we contemplate achieving, we’re growing that business as fast as we can. Where it’s not achieving it, we’re striving to achieve it. Where we can’t earn an underwriting profit, we’re shrinking. Where it’s adequate, we’re growing as fast as we can. And we have the capital, the depth of balance sheet and an appetite and knowledge and geographic reach and the distribution brand, the underwriting capability to grow in those areas where we want to grow.
And there are times we’ll trade rate for growth and we’ll — there are times we’ll trade growth for rate. We’re doing both. And when it comes to the current accident year combined ratio, I’ve said before and I’ve written this, it’s very interesting about the industry’s current accident year combined ratio ex-cat. Property is a much larger part and a growing — everybody is more cat-levered because of the changes in the [reinsurance] (ph) market, the rates and terms. And we take the cat loss out of the numerator, but in the denominator, we leave all the premium, that naturally drives down our current accident year combined ratio in mix of business all else being equal. So, it’s — I look — that’s a part and parcel of the published combined ratio, which is the primary number that everyone should look at.
And the current accident year to look through volatility is a secondary indicator. And that’s how I think of about. And I think what we published of an 86.8%, which has higher cat losses than prior quarter — prior year’s quarter because volatility in property is simply an outstanding number. I hope that answers your question. This is a company with big appetite and — but a big appetite and an ambition to grow when we can earn a reasonable return.”
4. American International Group, Inc. (NYSE:AIG)
Number of Hedge Fund Investors in Q1 2024: 54
American International Group, Inc. (NYSE:AIG) is the well known diversified insurance company headquartered in New York City. It is a global insurance company, and apart from offering homeowners insurance in America, it also offers similar products in lucrative regions such as Singapore. American International Group, Inc. (NYSE:AIG)’s homeowners insurance benefits from its scale, and allows it to offer features such as high deductibles that can reach as much as $10,000. Its stock is up 8.8% year to date, in a tough time for the insurance industry that has seen small and large firms suffer from high catastrophe outlays. This was also the case during American International Group, Inc. (NYSE:AIG)’s second quarter, which forced the firm to post a net loss of $3.98 billion driven not only by a loss recognition from its life insurance business but also due to catastrophe losses of $325 million. While this figure is just a fraction of its total loss, it marked a 25% annual jump and highlighted the risks of an internationally diversified business model since American International Group, Inc. (NYSE:AIG) suffered from storms in America and floods in the Middle East.
Clearbridge Investments mentioned American International Group, Inc. (NYSE:AIG) in its Q1 2024 earnings call. Here is what the firm said:
“One example of our internal return engine is our continued large position in American International Group (AIG), which we have owned for roughly 10 years. We originally bought AIG at a greater than 30% discount to our initial estimate of business value. This entry point assumed minimal improvements in the business but allowed us to absorb some inevitable downdrafts along the way that we took advantage of to build our position. The key, however, is that during this period AIG management dramatically improved their business. The company has compounded intrinsic business value per share at a double-digit rate by reducing risks as management overhauled their underwriting process, strengthened their balance sheet, cut expenses and operational complexity and structurally improved returns on equity. A major source of added lift came from intelligent capital allocation: shares outstanding have been more than cut in half during this period, as management bought back roughly 5% of the company annually below intrinsic business value.”
3. The Allstate Corporation (NYSE:ALL)
Number of Hedge Fund Investors in Q1 2024: 59
The Allstate Corporation (NYSE:ALL) is one of the biggest homeowners insurance companies in America. This means that it faces a substantial exposure to any climate related catastrophes which could force The Allstate Corporation (NYSE:ALL) to not only cover substantial claims but also reduce its market by not offering homeowners insurance in areas seeing greater weather related disruptions. At the same time, the shifting climate patterns also introduce a ‘climate driven element’ to its share price, with moderate weather expectations helping the shares. The Allstate Corporation (NYSE:ALL)’s shares are among the top performers among mega US insurers this year as they have gained 23% year to date. Several factors have played into this, including the mild weather and The Allstate Corporation (NYSE:ALL)’s multi year strategy that has seen it focus aggressively on customer acquisition. This provides it an advantage in a market where insurance premiums are rising, and conversely, low customer growth could negatively affect the share price. The Allstate Corporation (NYSE:ALL) also benefited from premium increases during its Q2, with premiums jumping to $15.4 billion to mark a 12% annual growth.
Commenting on its customer acquisition efforts, here’s what The Allstate Corporation (NYSE:ALL)’s management had to say during the Q1 2024 earnings call:
“The components of transformative growth are being implemented to create sustainable growth. An improved competitive position will result from further expense reductions. Expanded customer access comes from increased Allstate agent productivity enhanced direct distribution and the expansion of custom 360 to more independent agents. A new Allstate brand, affordable, simple and connected auto insurance product is available in nine states on the direct sales side. Online quote completion time has been reduced by 40% to less than three minutes within the new technology ecosystem. This platform will be expanded to the Allstate agent channel this year into more states and homeowners over the next several years. With these growth levers, Allstate is positioned to generate sustainable, profitable growth.”
2. The Progressive Corporation (NYSE:PGR)
Number of Hedge Fund Investors in Q1 2024: 85
The Progressive Corporation (NYSE:PGR) is another mega insurance provider, and also one that has successfully managed the headwinds the industry has been facing. Like other insurers, it was forced to raise its premiums in 2023, but unlike others, The Progressive Corporation (NYSE:PGR) chose to bite the bullet and reduce its costs at the same. This paid off when the claims dropped this year, as the sticky higher premiums coupled with lower costs boosted The Progressive Corporation (NYSE:PGR)’s margins. In fact, despite the lower market spending, The Progressive Corporation (NYSE:PGR)’s Q1 policy in force grew by 7.1% to $30.8 billion. The effectiveness of its management is also reflected in the share price, as PGR’s shares are among the top year to date performers in our list. They are up by 33% year to date. The Progressive Corporation (NYSE:PGR)’s premiums jumped by a strong 19% annually during Q2 and its combined ratio sat at 91.9%, which not only indicated profitability but was also higher than the previous reading of 100.4%.
Artisan Partners mentioned The Progressive Corporation (NYSE:PGR) in its Q1 2024 investor letter. Here is what the firm said:
“Progressive Insurance shares rose 30% during the quarter. After a difficult start to 2023, the company quickly adapted and finished the year with impressive growth in premiums and underwriting profits. In Q4 2023, it managed to grow its customer base even as it raised rates and improved its underwriting ratios—a trifecta that isn’t often seen in the insurance industry. This performance has continued, which should set the stage for another year of good results in 2024. Perhaps most importantly, it has been able to navigate the environment far better than its peers, many of whom are still reporting sub-par underwriting performance. Progressive has consistently gained market share in the personal auto market over our ownership period and now commands close to 15% of the total market. Its shares are no longer a bargain, but we continue to hold them due to the high quality of this business and the advantaged nature of its low-cost insurance franchise.”
1. Berkshire Hathaway Inc. (NYSE:BRK-B)
Number of Hedge Fund Investors in Q1 2024: 119
Berkshire Hathaway Inc. (NYSE:BRK-B) is the multi billion dollar investment firm owned by Warren Buffett. It earned $24.6 billion in insurance revenue during Q1 2024. Berkshire Hathaway Inc. (NYSE:BRK-B) operates in homeowner insurance primarily through its GEICO business. GEICO is the firm’s biggest insurance business, and Buffett bought it in 1996. It has been in the business for 86 years, and due to its parent Berkshire Hathaway Inc. (NYSE:BRK-B), GEICO benefits from more than $200 billion of cash and short term investments that can help it during the time of crisis. Since Buffett also invests through Berkshire Hathaway Inc. (NYSE:BRK-B), his insurance companies benefit from a unique business model that generates a substantial amount of cash and provides financial backing. Its homeowners insurance business depends on part on the larger auto insurance business since GEICO focuses on offering homeowner policies to its existing auto insurance customers.
Vitava Fund mentioned Berkshire Hathaway Inc. (NYSE:BRK-B) in its Q4 2023 investor letter. Here is what the firm said:
“Berkshire Hathaway continues to be a very unique type of conglomerate whose investments generate huge amounts of cash and which can successfully reinvest that cash again and again over the long term. It is an almost perfect case of a snowball in the markets. Here is one interesting fact: we estimate that the intrinsic value of a single Berkshire share is currently growing at a rate of about $178 per day. When we bought the shares 12 years ago, this was less than $50 a day. The rate of growth is accelerating gradually and with minimal fluctuations. Moreover, Berkshire has additional decades of similar growth still ahead of it.”
BRK-B is the unsurprising top hedge fund insurance stock pick. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BRK-B but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None.