3 Top Insurance Stocks To Buy

Insurance is a long-standing industry for a reason. Disasters happen, and insurance companies underwrite policies to protect people against catastrophic losses. Whether it’s your health, life, house, car, or even your pet, there’s a good chance an agent can find a policy to cover you.

These companies earn their money by charging customers monthly and annual premiums for their policies. A loss ratio is the difference between how much premium money is collected and how much claim money is paid. The leftover profit, called “float,” is then invested on the market to generate profits.

Which companies are best at acquiring customers and investing the float? In other words, what are the top insurance stocks to buy?

High infection rates and unemployment both affected the number of policyholders and claims payouts. The 2020s are going to be a rough ride for the industry, but these three companies have a solid road map to get through it.

AFLAC Is A Supplemental Insurance Provider

You’ve likely heard Gilbert Gottfried or Dan McKeague voicing the infamous duck from the commercials that screams “AFLAC!!!” like a Pokémon.

Aflac (NYSE:AFL) is the largest supplemental insurance provider in the United States, and it has a global footprint too. The company makes its money covering all the out-of-pocket expenses left in other insurance policies.

AFL share price got pummeled by the worldwide slowdown. Its biggest problem is payroll insurance is one of its more prolific product offerings, and that came up a lot since the COVID-19 outbreak.

On top of this, record high unemployment rates mean a lot of people and businesses are cutting back on expenses, and it could have trouble holding onto customers are renewal.

Aflac could find itself on the hook for a lot of money and having its loss ratios squeezed, but it’s also expanding its footprint to bring more revenue.

The company spent $200 million to buy a 9 percent stake in pet insurance company Trupanion Inc (NASDAQ:TRUP) near the end of 2020. In what they call a “distribution alliance,” Aflac gets a unique product offering for its customers, while Trupanion gains exposure to a broader audience.

This win-win scenario, coupled with over 30 years of consistent quarterly dividend payments have bulls singing Aflac’s praises through the 2020s.

It also has less exposure to the housing market than its competitors, which protects it from any potential foreclosure crisis looming ahead.

Allstate Has Targeted Younger Customers & Won

Allstate (NYSE:ALL) was originally part of Sears, Roebuck and Co before being spun off as its own public company in 1993. It’s a component of both the S&P 100 and S&P 500 and one of Fortune 500’s largest corporations in the U.S. by total revenue.

It’s a traditional insurer from the 20th Century, but it also made moves over the 2010s to modernize and increase revenue streams with younger consumers.

The company has its own unique advertising campaigns utilizing actors Dennis Haysbert and Dean Winters in a variety of TV and streaming video commercials. It expanded its footprint in 2011 by acquiring Esurance, a popular online insurance platform, for $1 billion.

It also bought SquareTrade for $1.4 billion in 2017 to expand into consumer electronics and appliance insurance. In the aftermath of the pandemic, the company announced a $4 billion acquisition of National General Insurance to further expand.

Allstate remains relevant by offering insurance products to meet every need. Its safe driver program, for example, provides a discount for anyone who doesn’t report an accident each year.

Because it’s still a traditional insurance company, Allstate is increasing its customer base and revenues the traditional way. It pours money into advertising, buys new companies with coveted customers, and shifted its agent commission structure to better serve customers.

It brought in $11.5 billion in revenues in the first nine months of 2020 and earned $923 million in profits from it. The company has been on a hot streak since 2019, and the economic slowdown hasn’t hurt it much so far.

Unlike Aflac, however, Allstate does have exposure in mortgages and could face issues as the economy recovers over the next decade. It could experience a slow, steady decline while losing market share to its younger competitors.

Lemonade = Artificial Intelligence + FinTech

Lemonade (NYSE:LMND) is a fintech company that disrupted the insurance industry by placing a sleek user interface over intelligent machine learning algorithms. This helps it to reach potential customers in markets other insurance companies miss.

And because it has such a robust technology infrastructure, it saves a lot on operational costs. Much of Lemonade’s customer-facing support is automated. It’s an omnichannel approach that includes in-app chat, email, and more.

By reducing costs and optimizing the entire insurance process, Lemonade stands to achieve better loss ratios than its competition. In fact, its loss ratios in 2020 were 10 percent below industry averages, while catastrophic (CAT) losses were 75 percent below the competition.

It’s also growing at an extremely fast rate – the company reached one million customers within five years, compared to competitors like Geico and State Farm, which took about 20 years to hit that milestone.

Still, it’s valued like both a tech and insurance stock. Lemonade’s trading price is over 86 times its trailing 12-month sales. That’s closer to an Amazon (AMZN) than an Allstate, which trades under 10, and gives investors pause when seeing its $17.3 million in profits over the first nine months of 2020.

When life hands you lemons, this $9 billion Lemonade could be the way to quench your thirst. Bulls believe this company has more growth potential than traditional insurers, but bears argue everyone has similar tech.

Between these three insurance stocks, investors can hedge their bets across the industry. Each competes in some overlapping markets. But they largely work in their own lanes. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.