Insurance Stocks Are on a Roll. 6 Picks for the Rally.

The thing is, many insurers don’t make much money from selling insurance. Claims and the expenses of running the business often exceed the revenue from premiums in a typical year. To make up the difference, insurers invest capital in large and diversified portfolios of sovereign and corporate bonds, common and preferred stocks, mortgage loans and securities, real estate debt and equity, and other investments to generate returns.

That makes insurers’ results sensitive not only to natural disasters and car crashes, but also to financial markets. A particularly bad year of natural or man-made disasters that produces large claims payouts, or a losing year for markets, can reduce capital. That’s usually followed by a so-called hard market of rising premiums as insurers rebuild their surplus.

The property and casualty insurance industry is several years into a hard market, and reinsurance has just entered one. Last year was tough for stocks and bonds, while the industry’s insured losses exceeded $100 billion globally for only the fifth time in history, according to Deutsche Bank analyst Cave Montazeri. This year is on track to top that figure—we’ve had hurricane damage in Florida, a devastating Turkish earthquake, and Maui wildfires, among other catastrophes.

Next year should bring more strong price increases, analysts say, advantaging firms with the strongest capital and ability to self-fund growth. Here are six insurance stocks to consider.

Arch Capital Group

Formed in 2001, specialty insurer
Arch Capital Group
has a reputation for conservative underwriting practices that generate superior returns. It’s helped by the fact that it has grown to be the world’s largest provider of mortgage insurance since acquiring
American International Group’s
(ticker: AIG) division in 2016. That business throws off ample free cash flow, meaning that Arch can self-fund growth in today’s hard market—versus a pure-play reinsurer that might need to raise expensive capital elsewhere. “They allocate capital really well,” says Haruki Toyama, manager of the
Madison Mid Cap
fund (GTSGX), which counts Arch as its largest holding. “They win over time by underwriting more when pricing is attractive and less when it’s not.”

Chubb

Like Arch Capital, property and casualty insurer
Chubb
has a strong record of quality underwriting through both soft and hard insurance markets. Its investment returns are looking up, too. At the end of the second quarter, 86% of the insurer’s $117 billion portfolio was in bonds, with an average duration of nearly five years. As it rolls over holdings in 2024, it will reinvest them in higher-yielding securities. Over the longer term, Chubb should enjoy a boost to growth from its Asian insurance businesses. Despite making up 40% of world gross domestic product, Asia is responsible for just 26% of global insurance, a gap that should narrow over time, says Deutsche Bank’s Montazeri. He has a $269 price target on Chubb stock, up 30% from recent levels.

Everest Group

Reinsurer
Everest Group’s
stock looks more than ready to scale the mountain. Wall Street analysts forecast earnings-per-share growth of nearly 90% for the company this year, driven by stronger pricing, followed by 15% in 2024. “This is truly a generational hard market,” said Chief Financial Officer Mark Kociancic on an earnings call earlier this year. Wells Fargo analyst Elyse Greenspan points to several favorable catalysts for Everest Group stock: She expects strong third-quarter results in late October, new long-term financial targets at an investor day on Nov. 14, and positive pricing updates in January following reinsurance renewals to start the year. Greenspan has a price target of $452 on Everest shares, up 16%.

W.R. Berkley

W.R. Berkley,
with peers like
Markel Group
(MKL) and
Kinsale Capital Group
(KNSL), plays in the “excess and surplus,” or E&S, part of the insurance market, offering bespoke insurance lines for more-complex risks. That can mean insuring everything from racehorses to summer camps to cannabis cultivation. Because of their policies’ idiosyncratic natures, E&S insurers’ underwriting profit margins are far superior to those of standard insurers’ commoditized lines. W.R. Berkley stock is attractive right now, trading at a meaningful discount to its historical average price/earnings and price-to-book-value ratios. Analysts, on average, are forecasting 20% earnings-per-share growth in 2024.

Metlife

Life insurers tend to be more sensitive to financial market fluctuations than others, leading to more-volatile results—and lower valuations. Take
MetLife,
which trades for less than seven times expected 2024 earnings. While an uncertain outlook for stocks and bonds may continue to weigh on the multiple, MetLife has other ways to win. The insurer has vastly simplified its portfolio in recent years, spinning off its low-margin annuities unit as
Brighthouse Financial
(BHF) and selling other divisions. Now focused on employee benefit programs and other traditional insurance, MetLife is growing free cash flow and has boosted its stock-buyback plans—a good move when shares are this cheap.

Arthur J. Gallagher

Insurance brokers like
Arthur J. Gallagher
are the middlemen between insurers and companies looking to manage their risks. It’s a capital-light business that tends to grow at the pace of nominal gross domestic product. In recent years, insurance brokers have morphed into “professional services firms” by adding a variety of offerings in healthcare, human resources, and talent consulting. Gallagher is best positioned to benefit from today’s hard market in insurance pricing, says Deutsche Bank’s Montazeri, with 85% of its sales still coming from insurance brokerage. Higher premiums in a hard market mean larger commissions for Gallagher. His price target of $277 implies a 19% upside.

Write to Nicholas Jasinski at [email protected]