It's no doubt that markets have had a rough go of it in the past few months. Over the past year, the S&P 500 is up about 6% and thus far in 2022 the market is down over 9%.
However, not all stocks have been going down with the market. Value stocks have performed well this year. Specifically, insurance stocks, which have pricing power and could benefit from rising interest rates, have done particularly well. Three insurers delivering returns of 17% to 30% in the past year that you can buy today are Allstate (ALL -1.32%), Cincinnati Financial (CINF -6.38%), and Aflac (AFL -0.14%).
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1. Allstate
Allstate is a provider of insurance policies focusing on automotive and homeowner's policies. Insurance companies bring in cash by writing policies and then pay out from those funds when a customer files a claim. Between the receipt of cash and the payment of claims, insurers can invest that cash (or float) and earn interest on the funds -- which is also why Warren Buffett is a big fan of insurance companies.
The combined ratio is a measure of profitability for insurance companies, which is the ratio of claims paid out plus operating expenses divided by the total premiums written. A ratio below 100% means the insurer is profitable, but a lower ratio is preferable.
Well-run insurers can weigh risk and take in more money than they pay out in claims over the long run -- and Allstate is one of the best. Since 2011, Allstate's combined ratio hasn't gone above 96%. Allstate's combined ratio stayed below 96% even last year when inflation put pressure on insurers' bottom line.
Claims were on the higher end for Allstate and other insurers due to the increased cost of used cars, automotive parts, and labor costs to fix customer claims. Losses in the first quarter were $462 million, down from $590 million the year prior but still higher than management would like.
Insurers can be solid stocks to own during inflationary times because of their ability to adapt. In response to higher claims, Allstate will continue to raise premiums. Since the beginning of the fourth quarter, Allstate has implemented 53 rate increases that averaged 8.2%. This pricing power is one reason why investors currently like the insurer, and the stock has gained 17% in the last year.
2. Cincinnati Financial
Cincinnati Financial primarily writes property and casualty insurance for commercial businesses along with automotive and homeowners' policies for individuals to a lesser extent. The insurer has displayed a solid ability to underwrite profitable policies. Since 2011, it has averaged a combined ratio of 94.6%.
As competition heats up in the insurance space with newer entrants like Lemonade, Cincinnati Financial isn't waiting around. The company uses artificial intelligence that builds on its trove of data and helps it ensure its policies are profitable. It credits these models for helping it lower its share of property and casualty losses in recent years, helping it avoid high-risk geographic locations like where Hurricane Ida wreaked havoc last year.
Cincinnati Financial is also a solid dividend stock. For 62 years straight, the company has increased its annual dividend payout -- making it a member of the exclusive Dividend King club. Last year Cincinnati Financial saw its earned premiums grow 8% to $6.5 billion while its net income jumped 142% to $2.9 billion, and the stock price is up 30% in the last year.
3. Aflac
Aflac is a leading provider of life insurance and other supplemental insurance policies to employer-based group insurance plans in the U.S. and Japan. When countries worldwide shut down amid the emergence of COVID-19, Aflac felt the heat. U.S. unemployment surged to 23 million at one point, and Aflac's business got slammed, seeing sales drop 31% in the U.S. and 36% in Japan.
The business is ready to bounce back and stands to benefit from rising interest rates. The last few years it has been plagued by low interest rates, which impacted its investment income. However, with interest rates rising across many assets, the insurer stands to benefit as new premiums collected can be put to work on higher-yielding assets -- driving higher interest income.
Not only that, but the lifting of restrictions relating to the pandemic can also help its sales. Aflac has been heavily reliant on face-to-face sales -- especially in Japan. Also, it has introduced new products like cancer insurance, expanded its dental and vision products, and now targets 127 million Americans who don't have access to its group insurance products through their employer.
Like Cincinnati Financial, Aflac is a solid dividend stock. The company has increased its dividend payout for 39 years straight, making it a member of the Dividend Aristocrat club. Although Aflac sales were down 0.2% in 2021, investors are optimistic about the company bouncing back, and the stock price is up 25% in the last year.
