3 Smart Insurance Stock Picks for the Week Ahead
The insurance industry is known to thrive in a rising interest rate environment. Although inflation has eased significantly, it remains well above the Fed’s 2% target, making room for more rate hikes. Hence, smart insurance stocks Berkshire Hathaway (BRK.B), Fairfax Financial (FRFHF), and Heritage Insurance (HRTG) could be ideal additions to your portfolio this week. Read more….
The insurance industry generally thrives in a high-interest rate environment. Insurers generate revenue by charging premiums in exchange for coverage, with the collected premiums invested in interest-generating assets, which generate higher yields when interest rates increase.
Despite prevailing economic uncertainties, the insurance industry is expected to show significant resilience this year and beyond, with solid prospects in its property and casualty segment. Thus, quality insurance stocks Berkshire Hathaway Inc. (BRK.B), Fairfax Financial Holdings Limited (FRFHF), and Heritage Insurance Holdings, Inc. (HRTG) could be ideal buys this week.
The interest rate environment has a significant impact on several segments of the financial sector, including the insurance industry. Higher interest rates generally allow insurers to realize greater profits due to an increased yield from their underlying bond investments.
In July, the Federal Reserve raised its key interest rate by 0.25% to a range of 5.25%-5.5%, the highest level in more than two decades, as it continues to fight persistent inflation. The consumer price index (CPI) rose 3.2% year-over-year in July, slightly below the 3.3% forecast. Moreover, this would be significantly below inflation’s peak of 9.1% in June 2022.
However, Fed minutes released last week from the most recent meeting showed that Fed officials expressed concerns about the pace of inflation and said further rate hikes could be necessary.
“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the meeting summary stated.
Despite the economic slowdown and inflation, the insurance industry demonstrates significant resilience. Last year, total global insurance premium income amounted to approximately €5.6 trillion ($6.09 trillion), as per a report by Allianz Trade. The property and casualty (P&C) segment saw the most growth at 8.7%.
The rise in P&C premiums was driven by all regions worldwide, but more than half of last year’s global increase came from North America, specifically the US alone. With a premium income of €860 billion ($934.67 billion), North America remains the largest market in the world by a considerable margin.
According to a report by Mordor Intelligence, the US property and casualty insurance market is expected to register a CAGR of 6% during the forecast period of 2023-2028. Cyber insurance is the fastest-growing line in the US. A significant increase in net premiums written in the P&C sector should drive the market’s growth.
Furthermore, digital transformation could provide P&C insurance companies with numerous opportunities to expand their business and generate new sources of revenue. Advanced technologies such as AI, machine learning, blockchain, sensor technology, and the cloud would increasingly grow powerful in core tasks within the industry.
For example, AI can boost efficiency and accuracy in various aspects of P&C insurance, from underwriting and risk management to claims management. Also, blockchain can be used to enhance the trust and transparency between insurers and the parties they insure.
Investors’ interest in insurance stocks is evident from the SPDR S&P Insurance ETF’s (KIE) 4.2% returns over the past three months.
Given the industry’s promising prospects and prevailing high-interest rate environment, fundamentally sound insurance stocks BRK.B, FRFHF, and HRTG could be solid investments this week.
Let’s discuss the fundamentals of these stocks in detail:
Berkshire Hathaway Inc. (BRK.B)
BRK.B engages in the insurance, freight rail transportation, and utility businesses globally. The company offers property, casualty, life, accident, and health insurance and reinsurance; and operates railroad systems in North America. Also, it generates, stores, and distributes electricity from natural gas, coal, wind, solar, nuclear, and geothermal sources.
The company nearly used $1.4 billion to repurchase shares during the second quarter of 2023, bringing the six-month total to $5.8 billion. On June 30, 2023, there were approximately 1,447,541 Class A equivalent shares outstanding. Share repurchase would enable BRK.B to generate additional shareholder value.
BRK.B’s trailing-12-month EBITDA margin of 36.58% is 83.1% higher than the 19.98% industry average. In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 17.31%, 10.88%, and 8.32% are favorably higher than the…