Let's face it, insurance stocks aren't the most exciting investments. Business for insurers tends to be slow, steady, and consistent, and investors tend to overlook these stocks. But in today's market environment defined by volatility and uncertainty because of rising interest rates, slow, steady, consistent companies are highly sought after by investors.
Insurers also had some tailwinds boost their businesses, and their defensive nature and steady cash flows make them attractive investments. Since the start of 2022, the SPDR S&P Insurance ETF (KIE -0.74%) delivered investors a return of 4.8%, while the S&P 500 index dropped 14.9%.
Here are five humdrum insurance stocks that produced returns of 26% or more so far this year.
Property and casualty insurers quickly adapted to inflation
Inflation has been persistent for much of the past two years. The Consumer Price Index (CPI), a common measure for inflation in consumer goods, showed year-over-year increases of 5% or more every month since June 2021.
As insurers see claims data roll in, they can see if costs are rising rapidly and adjust the premiums they charge relatively quickly, making insurance stocks a solid hedge against inflation. One example is Progressive (PGR -1.00%). Progressive is one of the best property and casualty (P&C) insurers in the game and is best known for its automotive and homeowners insurance. It stands out because of how quickly it adapts to a changing environment.
Last year, the company saw accidents increase in frequency by 14%, and the cost of resolving those claims was up 9%. This increase was primarily due to the uptick in used car prices and increased labor costs to settle claims. Progressive responded quickly by raising premiums and cutting out less-profitable policies it was writing. This year, the insurer's net premiums earned are up 11%, and its stock is up nearly 28%.
Another P&C insurer crushing it this year is W.R. Berkley (WRB 0.08%), whose stock is up over 36%. Berkley focuses on commercial insurance, writing policies for businesses to protect them from liability issues, and covering the healthcare, cybersecurity, energy, and agriculture fields. This year its net premiums earned are up 19%, driving robust revenue and earnings-per-share (EPS) growth of 19% and 38%, respectively.
Aside from collecting premiums, insurers invest excess cash (often referred to as the "float") as another way to produce income. Berkley invests its float in fixed-maturity securities, and this year it was able to invest its float at higher yields every quarter. The yield on these securities has gone from 2.2% in the first quarter to 3% in the third quarter and helped it generate a record $203 million in investment income in the third quarter. Management expects this growth to continue as the Federal Reserve keeps raising its benchmark interest rates.
Waning pandemic effects boosted these life insurers
The pandemic made things especially difficult for life insurance companies. When the pandemic emerged, countries locked down, and unemployment rates skyrocketed, reducing the employee count and, thus, the number of customers life insurers served.
Additionally, the virus caused a jump in mortality rates, and insurance claim payouts soared. According to the American Council of Life Insurers, U.S. life insurers paid $90 billion to beneficiaries in 2020, a 15% jump and the largest annual increase since the 1918 influenza epidemic. Claims jumped another 11% in 2021. This year, life insurers have seen payouts decline, which is helping their bottom lines.
Reinsurance Group of America (RGA 0.03%) provides reinsurance products -- or insurance that one insurer will buy from another to protect it from significant catastrophes -- for life insurers. This year, the company saw lowered claims and estimates its U.S. claims costs to be $45 million, on the low end of its expectations.
Its premiums grew nearly 6% for the year while its diluted EPS growth is 8%, reflecting the lower claims costs' impact. Reinsurance Group of America stock gained 27% since the start of the year.
Globe Life (GL -3.89%) is a life insurer that saw claims costs explode to $140 million last year as it dealt with higher claims involving young individuals. It's beginning to see mortality rates return to the historical average, and expects COVID-19-related claims to fall to $51 million this year and $20 million next year. Globe Life stock is up nearly 27% year to date.
Finally, Unum Group (UNM -0.47%) is one of the biggest winners this year, as its stock jumped a whopping 69%. The company also saw fewer claims on its group life insurance and group disability from last year and raised its outlook multiple times.
Earlier this year, it guided for growth in after-tax adjusted operating income per share of 4% to 7% for the year. It raised these expectations every quarter this year thanks to fewer claims, and as of the third quarter, it expects full-year growth to be around 40% to 45%.
Here's why insurers could continue to outperform
Insurance companies are solid hedges against inflation because of their ability to adjust premiums, and fewer pandemic-related claims should benefit life insurers.
Insurers also benefit from higher interest rates, which allow them to generate higher investment income. After over a decade of ultra-low interest rate policies, insurers are beginning to see the yields on their investment portfolios increase, which should serve as another tailwind for growing income.
