Insurance isn’t a terribly exciting business, but there’s no doubt that insurance stocks have held up well in recent years. over the past three years, S&P Insurance ETF may overcome Standard & Poor’s 500with returns of 71.3% vs. 64.8%.
Insurance stocks can make solid investments because the insurance business experiences a steady flow of demand during periods of economic growth or periods of inflation. However, no insurance stocks will do. One of the things I like to see from top insurance companies is a track record of stellar profits and a business that can weather tough times.
gradual (PGR 0.41%) And Marsh and McLennan (MMC 0.70%) It has a history of success during various recessions. Kinsale Capital (KNSL 0.45%) It has a short but successful history so far and excellent potential. Here’s why all three insurance stocks were attractive buys in April.
Progressive drives ahead of the competition
Progressive offers insurance policies and primarily covers auto insurance but also has a smaller property insurance business. Progressive has been crushing the broader insurance market with its excellent underwriting capacity.
Its secret advantage is its long-term use of telematics, or data about driver behavior, to price its policies. Progressive rolled out IT in 2004 on a limited basis, and made it widely available to customers in 2010 with its Snapshot product. By collecting various data points such as driving speed, brake time, and miles traveled, Progressive can determine its risk and pricing policies to perfection.
One of the critical metrics used to evaluate an insurance company is the combined ratio. This proportion of expenses plus claims paid, divided by the total premiums obtained, is expressed as a percentage. A ratio of less than 100% means that the insurance company is writing profitable policies. Over the course of 21 years, Progressive’s combined percentage averaged 91.6%. The property and casualty (P&C) insurance industry average is pretty close to break-even at 99.9%.
DATA SOURCES: Progressive regulatory filings and the National Association of Insurance Commissioners. Planned by the author.
The insurance industry is highly competitive, and Progressive’s collection of driver data allowed it to connect to its pricing model – setting it apart from the competition.
In the past year, it has quickly adjusted to rising vehicle repair and replacement costs and implemented price increases to maintain profitable policies. While the combined industry average ratio rose to 102.7% last year, the combined Progressive ratio was an excellent 95.8%.
Progressive has also outperformed across various economic cycles, beating the market through the past three recessions, making this insurance company a strong buy today.
Marsh & McLennan helps clients get through tough times
Marsh & McLennan advises companies on strategic and workplace issues and thrives on uncertainty. He has become a trusted advisor to clients seeking advice on workplace strategies, compensation and benefits, environmental issues, and navigating difficult economic times. It also advises clients on managing risks and purchasing insurance. Last year, its advisory business made up 39% of its total revenue, while risks and insurance made up the rest.
Marsh & McLennan connects customers with insurance companies and makes money from commissions for making these connections. During expanding economies and times of inflation, higher insurance rates help earn higher commissions and drive growth in this part of their business.
Last year, global insurance rates continued to rise, and the fourth quarter saw insurance rates increase for the 21st consecutive quarter. Overall, revenue from the risk and insurance business was up 5% last year.
Marsh & McLennan’s business is relatively asset-less, producing healthy margins and strong cash flows. Last year, free cash flow, or the cash left over after paying operating expenses and capital equipment, was nearly $3 billion.
Image source: Marsh & McLennan.
Marsh & McLennan has done a solid job across the economic cycles. CEO Dan Glaser said the company has grown earnings per share in every recession since 1962 and said, “When the world is unstable, demand for our services goes up.”
With its trusted advisor position, strong cash flows, and long-term performance, Marsh & McLennan is another solid insurance stock to consider buying today.
Kinsale Capital has been very successful in its short history
Kinsale Capital writes policies on hard-to-cover risks that traditional insurers won’t cover. This niche market for the P&C industry is called excess and excess (E&S) insurance.
As its name suggests, this insurance goes beyond traditional insurance policies, including professional liability, small business, product, and professional liability coverage. E&S insurance can be very profitable because companies have more flexibility in the types of policies they cover and how they choose to price those policies. As a result, E&S insurers compete on knowledge and expertise, not price.
Kinsale has done an excellent job of building its homegrown platform, which allows it to leverage technology as well as years of data and experience to focus on the most profitable opportunities. Since going public in 2016, Kinsale’s combined percentage has averaged 81%. Its years of outperformance is a testament to its technology platform and management’s ability to identify and capitalize on high-profit opportunities.
Since 2016, Kinsale has crushed the S&P 500. It’s had a shorter history than the two insurance companies mentioned above, so we still have to see how it fared through tough times. However, its stellar performance in its young history makes it a strong insurance stock worth buying today.