Insurance isn't a terribly exciting business, but there's no doubt that insurance stocks have held up quite well in recent years. Over the last three years, the S&P Insurance ETF has beaten the S&P 500, with returns of 71.3% compared to 64.8%.
Insurance stocks can make solid investments because the insurance business sees a steady stream of demand during economic growth or inflationary periods. However, not any insurance stock will do. One thing I like to see from top insurers is a track record of stellar profits and a business that can weather difficult times.
Progressive (PGR 2.35%) and Marsh & McLennan (MMC 0.34%) have a proven history of success through various recessions. Kinsale Capital (KNSL -0.02%) has a short but successful history thus far and excellent potential. Here's why these three insurance stocks look like attractive buys in April.
Progressive drives ahead of the competition
Progressive writes insurance policies and mainly covers automotive insurance but also has a smaller property insurance business. Progressive has long crushed the broader insurance market with its excellent underwriting ability.
Its secret sauce is its long-term use of telematics, or data on driver behavior, to price its policies. Progressive rolled out telematics in 2004 on a limited basis, making it widely available to customers in 2010 through its Snapshot product. By collecting various data points like driving speed, brake time, and mileage driven, Progressive can define its risk and price policies to perfection.
One crucial metric used to evaluate an insurance company is the combined ratio. This ratio of expenses plus claims paid out, divided by total premiums taken in, is expressed as a percentage. A ratio below 100% means an insurer is writing profitable policies. Over 21 years, Progressive's combined ratio has averaged 91.6%. The property and casualty (P&C) insurance industry average is right near breakeven at 99.9%.
Data sources: Progressive regulatory filings and the National Association of Insurance Commissioners. Chart by author.
The insurance industry is highly competitive, and Progressive's trove of driver data has allowed it to dial in its pricing model -- putting it head and shoulders above the competition.
Last year, it adapted quickly to the rising costs of repairs and replacement vehicles and implemented price increases to maintain profitable policies. While the industry average combined ratio climbed to 102.7% last year, Progressive's combined ratio was a stellar 95.8%.
Progressive has also outperformed across various economic cycles, beating the market over the past three recessions, making this insurer a solid buy today.
Marsh & McLennan helps clients navigate challenging times
Marsh & McLennan advises companies on strategic and workplace issues and thrives amid uncertainty. It has become a trusted consultant for clients seeking advice on workplace strategies, compensation and benefits, environmental issues, and navigating challenging economic conditions. It also provides advice to clients to manage risk and buy insurance. Last year its consulting businesses accounted for 39% of its total revenue, while risk and insurance comprised the remainder.
Marsh & McLennan connects clients with insurance companies and makes money on commissions for making these connections. During expanding economies and inflationary times, rising insurance prices help it earn higher commissions and drive growth in this part of its business.
Last year global insurance prices continued their rise, and the fourth quarter marked the 21st consecutive quarter of increasing insurance prices. Overall, its risk and insurance business revenue rose 5% last year.
Marsh & McLennan's business is relatively asset-light, producing good margins and solid cash flows. Last year, its free cash flow, or 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 economic cycles. CEO Dan Glaser said the firm has grown its earnings per share in every recession since 1962 and said, "when the world is unsettled, demand for our services rises."
Given its trusted advisor position, solid 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 within the P&C industry is called excess & surplus (E&S) insurance.
As its name implies, this insurance is above and beyond traditional insurance policies, including professional liability, small business, product, and professional liability coverage. E&S insurance can be highly 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 a stellar job of building its homegrown platform, which allows it to leverage technology plus years of data and experience to focus on the more profitable opportunities. Since going public in 2016, Kinsale's combined ratio has averaged a stellar 81%. Its years of outperformance are a testament to its tech platform and management's ability to identify and take advantage of high-profit opportunities.
Since 2016, Kinsale has crushed the S&P 500. It has had a shorter history than the two insurance companies above, so how it will perform during difficult times remains to be seen. However, its stellar performance in its young history makes it a solid insurance stock worth buying today.
