We recently published a piece titled Homeowner’s Insurance Rates Skyrocketing: 10 Best Stocks To Buy. In this article we are going to take a look at where Chubb Limited (NYSE:CB) stands against the other homeowner’s insurance stocks.
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).
A close-up of an insurance agent’s hand pointing to a marine insurance policy, highlighting the company’s expertise in marine coverage.
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.”
Overall CB ranks 5th on list of the best homeowner’s insurance stocks to buy. While we acknowledge the potential of CB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for AI stock that is more promising than CB but trades at less than 5 times its earnings, checkout our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
