Since taking over Berkshire Hathaway in 1965, Warren Buffett has delivered investors eye-opening returns of roughly 3,641,613% (through 2021), according to the company's annual report. That works out to a 20.1% compound annual gain over those 56 years. A crucial part of Buffett's success is his investments in insurance businesses. Buffett likes insurance companies because of the cash flows they generate, allowing Berkshire Hathaway to invest hundreds of billions of dollars of "other people's money."
Investing in insurance stocks right now is a solid move because these companies can quickly adjust premiums to account for inflation and invest their cash at interest rates that we haven't seen in years. In Buffett's letter to shareholders last year, he elaborated on his love of insurance, saying the products "will never be obsolete, and sales volume will generally increase along with both economic growth and inflation."
Three solid insurance companies you can buy today are Globe Life (GL 0.98%), Aflac (AFL 2.10%), and Progressive (PGR 2.79%). Let's find out a bit more about these three stocks.
1. Globe Life's insurance business got a boost from fewer pandemic-related claims
NYSE: GL
Key Data Points
Warren Buffett has owned stock in Globe Life since 2001, making it one of Berkshire Hathaway's longest-held stocks. The company sells life and supplemental insurance, with policies covering cancer, intensive care, and supplemental Medicare.
Life insurers like Globe Life struggled mightily during the pandemic, as claims costs exploded in 2020 and 2021. Things have improved since then, and through the first three quarters of 2022, the insurer saw claims expenses related to COVID-19 fall 45%. It expects these COVID-related claims to be cut in half again in 2023 -- which will boost its underwriting margin.
Underwriting margin is a measure of the profitability of insurance policies, which is premiums minus claims obligations and other expenses, and it can help investors better understand a company's underwriting performance. Even though life insurance premiums increased by 4% in the third quarter, lower claims expense boosted its underwriting income from these policies by 28%.
Another tailwind for Globe Life's business is rising interest rates. Insurers sit on a pile of money that they are free to invest in bonds, stocks, and other assets. Globe Life has a $17.6 billion investment portfolio invested chiefly in corporate and municipal bonds and has been capitalizing on higher interest rates this last year.
In the third quarter, Globe Life cut bonds with riskier credit ratings of BBB in favor of those with an average rating of A+, investing in companies that can perform across market cycles. It also saw the yield on its investment portfolio increase for the first time since 2008 and has taken advantage by investing $1.4 billion throughout the year.
Globe Life has had a solid performance in the last year, up 24.2%, and is well positioned to take advantage of higher interest rates and grow its margins as claims expense continues to come down.
2. Aflac saw fewer claims and capitalized on higher interest rates
NYSE: AFL
Key Data Points
Aflac is another life insurer benefiting from fewer claims expenses during the year, as its pandemic-related claims fell 10% through the first three quarters of 2022.
The company also benefits from regulatory changes, as the Japanese government plans to roll back some of its pandemic-era rules. One such rule is the practice of "deemed hospitalization," which allows for the payment of claims outside the care of a hospital. With hospitalizations down and less severe infections, the government narrowed the scope of its deemed hospitalization policies, which should lead to even fewer claims going forward for Aflac.
Its net earned premiums fell 13% compared to the prior year, but things are looking up in the third quarter as sales in its Japan segment were up 10.2%, while sales in its U.S. segment grew 11.8%.
Aflac also took advantage of higher interest rates, investing $1 billion in assets in its Japan segment at an average yield of 5.73% -- well above its average return on invested assets of 2.87%. It also added $427 million of investments in the U.S. segment with a yield of 6.24%.
The company is on a solid financial footing, with $114 billion in investments in cash, and rewarded income investors with its 2.24% dividend yield. It has managed its balance sheet well for decades, increasing its dividend for 40 consecutive years.
In short, Aflac is an excellent insurance stock you can buy today that can bring stability to your portfolio.
3. Progressive performance consistently crushes the stock market
NYSE: PGR
Key Data Points
Progressive has outperformed the market for years now. Since 2002, Progressive has delivered investors a spectacular 1,940% return. The S&P 500 index returned 401% in the same period.
The insurer focuses primarily on individual auto insurance policies and also writes policies covering commercial auto and property insurance. Progressive's secret sauce is its ability to balance risk and reward on its policies better than the competition. One way it has done this is through its early use of telematics, or driver data, to price its policies. Many companies have embraced telematics in recent years, but Progressive was the first when it rolled out its Progressive Snapshot product back in 2011.
The insurer's policies generated higher profit margins than competitors for decades. One key measure of profitability in insurance is the combined ratio. This ratio takes the claims plus expenses an insurer incurs in writing its policies, divided by the total premiums collected. A ratio under 100% is desirable, and since 2002, the average industry ratio has been 99.7% -- showing just how competitive the insurance landscape is. In the same period, Progressive's combined ratio averaged 91.4%, a full 83 basis points better.
Progressive is a company that thrives in all environments because of its stellar underwriting ability and is a top insurance stock you can add today that can bring both stability and growth to your portfolio for years to come.
