Insurance is big business in the United States. Premiums paid to insurance companies by Americans for home, auto, life and commercial insurance coverage totaled $1.22 trillion in 2018, according to S&P Global Market Intelligence. So, there’s a lot of profit to be made by finding the best insurance stocks.
The Organization for Economic Co-operation and Development (OECD) states that the average American spends $3,630 a year on various types of insurance – more if they run their own business. And the underlying trend has been for insurance premiums and the profits of insurance companies to steadily rise over time.
With many types of insurance coverage, such as automotive, required by law and so much money generated from premiums, it is easy to see why insurance companies are a favorite of well-known investors such as Warren Buffett, whose Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) holding company owns multiple insurance companies, including Geico and General Re.
Here are four of the best insurance stocks you can buy, representing some of the top publicly traded insurance companies on the market.
Best Insurance Stocks to Buy: Allstate (ALL)
By most measures, Allstate’s stock is undervalued. The stock has a price-earnings ratio of 8.4, which is well below the average P/E ratio of 22.66 for insurance company stocks. Over the last 12 months, Allstate’s median forward P/E ratio has been 10.4, which is low and indicates the stock is trading at a discount.
Additionally, Allstate recently announced second-quarter earnings that blew away expectations. The company reported earnings of $2.46 per share, beating the consensus estimate of analysts who were calling for EPS of $1.41 per share.
While revenues of $10.49 billion for the quarter ended June 30 were 2.87% lower than the $10.82 billion reported in the second quarter of 2019, the decline was attributed to the cancellation of commercial insurance by businesses that were forced to shut down during the pandemic.
Allstate shares are down about 15% this year compared to the year-to-date gain of 4.5% in the S&P 500 index. Investors seem to be cool towards ALL stock. However, there are reasons to believe in Allstate stock moving forward.
First, the company is in the process of acquiring National General Holdings (NASDAQ:NGHC), which will enhance Allstate’s market share in personal property liability. Also, Allstate is expanding into the “service business” segment. In 2017, Allstate acquired SquareTrade, a provider of protection plans for mobile phones, consumer electronics and appliances.
The company also purchased PlumChoice in 2018, a leading provider of cloud and technical support services to consumers and small businesses. This diversification positions Allstate well for the future.
In addition to diversifying, Allstate also has a strong balance sheet and cash flow, and its return on equity, at 17.5%, is well above the industry average of 6.5%, meaning that the company is using shareholder funds efficiently.
Analysts like ALL stock too. The median price target of 13 analysts who cover the stock is $119 a share, with a high estimate of $135 and a low estimate of $101 per share. The median estimate represents a 24% increase in ALL stock. There is currently a “hold” rating on Allstate’s shares.
Prudential Financial (PRU)
There are many reasons for investors to consider Prudential Financial, including the fact that the stock comes with a 6.2% dividend yield. Yet the Newark, New Jersey-based company hasn’t been getting a lot of love from investors recently.
The company’s stock is down 26% year-to-date and currently trades near $70 a share. Much of the downturn has been caused by disappointing earnings results. In the most recent quarter, Prudential Financial’s revenue declined 7.3% year-over-year to $13.1 billion. The drop was attributed to lower premiums, net investment income, management fees and commissions, according to the company.
Steps are being taken to turn things around. The company is selling many of its foreign operations, including a life insurance venture in Taiwan, in order to concentrate more on its U.S. business. And the company has also been restructuring many of its products in the wake of the Covid-19 pandemic.
And then there is that dividend. Prudential has increased its dividend in each of the past eight years, and over the past three years it has grown by 46%. The company declared a quarterly dividend of $1.10 per share for the third quarter on Aug. 11, maintaining the same payout it had in this year’s second quarter.
Not only is Prudential Financial’s dividend among the best in the insurance industry, it is one of the best in the broader financial services industry.
Given the lackluster performance of the company lately, analysts have a “hold” rating on the stock and a median price target of $69 per share. However, the high estimate on the stock is $99, and the shares should still appeal to investors who value dividend income.
Like the other insurers on this list, MetLife had a disappointing second quarter and its stock price has been punished for it. However, it would be a mistake to give up on the New York City-based insurance company.
While the most recent quarter disappointed, MetLife has increased its revenue and net income for four consecutive years. In the first quarter, before the full impact of the Covid-19 pandemic, the company’s net income was $4.4 billion compared with $1.3 billion in the same quarter last year. That’s a 238% annual increase.
Additionally, the company had $5.3 billion in cash and liquid assets, and MetLife’s investment portfolio income came in at $4.3 billion in the first quarter, a 1% rise year-over-year.
The positive position MetLife was in at the start of the pandemic means that the company can withstand its revenue falling to $758 million in the second quarter, down from $1.4 billion in the same quarter of 2019. And, among insurers, MET stock is woefully undervalued with a trailing 12-month P/E ratio of 4.8.
Plus, while MetLife’s dividend yield is not as strong as Prudential’s, the company did raise its quarterly dividend this year to 46 cents per share, an increase of 4.5% and part of a 10.7% compounded annual growth rate since 2011. To raise the dividend during the sharpest economic downturn on record is impressive.
Analysts recognize that MET stock is underappreciated at its current level of just under $40 a share. The 10 analysts offering 12-month price forecasts for MetLife have a median target of $44.50, a share, suggesting a potential 12% increase in the coming 12 months. The stock carries a “buy” rating.
Based in Mayfield Village, Ohio, Progressive is a property and casualty insurance company that has a strong track record of revenue growth and profitability. The company has recorded profits in 14 of the 15 years through 2019.
Like all insurers (and companies for that matter), Progressive’s business has been impacted by the global pandemic. But the company’s strength and growth rate have helped PRU stock to recover much of the ground lost during the March market crash. Progressive’s stock price is up 33% since it bottomed at $66.55 a share in March. At just under $90 a share, the stock is close to its 52-week high of $91.81 and is up 181% over the past five years.
Investors no doubt like the fact that Progressive has grown its earnings per share at a rate of 23% a year since 2015. While the dividend yield is low at just 0.44%, analysts remain bullish on PGR stock. There is currently a “buy” rating on the company’s shares and a median price target of $92 per share, with a high estimate of $109.
As one of the largest providers of car insurance in the United States, there’s good reason to expect Progressive’s overall business, and its stock price, to continue outperforming in the months ahead.
As of this writing, Joel Baglole held shares of BRK.B.