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 respective industry averages of 11.19%, 5.65%, and 1.14%.
Over the past three years, BRK.B’s revenue and EBITDA increased at CAGRs of 10.3% and 31.3%, respectively. The company’s net income grew at a 57.4% CAGR over the same time frame, while its EPS increased at a CAGR of 63.1%. Also, its levered free cash flow grew at a 36.9% CAGR.
For the second quarter that ended June 30, 2023, BRK.B’s total revenues increased 21.4% year-over-year to $92.50 billion. Its earnings before income taxes came in at $45.44 billion versus earnings loss before income taxes of $55.31 billion in the prior-year quarter. The company’s net earnings were $36.20 billion, compared to a net loss of $43.24 billion in the same quarter of 2022.
Furthermore, as of June 30, 2023, BRK.B’s cash and cash equivalents stood at $44.61 billion, compared to $32.26 billion as of December 31, 2022.
Analysts expect BRK.B’s revenue for the fiscal year (ending December 2023) to increase 5% year-over-year to $317.04 billion. Also, the company’s revenue for the current year is expected to grow 27.4% year-over-year to $17.81. Additionally, BRK.B topped the consensus EPS estimates in three of the trailing four quarters.
Shares of BRK.B have gained 16.5% over the past six months and 15.9% over the past year to close the trading session at $352.56.
BRK.B’s strong outlook is reflected in its POWR Ratings. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
BRK.B has a B grade for Momentum, Sentiment, and Stability. It is ranked #23 among 56 stocks in the B-rated Insurance-Property & Casualty industry.
Click here to see the additional ratings of BRK.B for Growth, Quality, and Value.
Fairfax Financial Holdings Limited (FRFHF)
Headquartered in Toronto, Canada, FRFHF offers property and casualty insurance, reinsurance, and investment management services in the United States, Canada, Asia, and internationally. The company operates through Property and Casualty Insurance and Reinsurance; Life insurance and Run-off; and Non-Insurance Companies segments.
In terms of forward EV/Sales, FRFHF is currently trading at 0.94x, 67.7% lower than the industry average of 2.90x. And the stock’s 0.68x forward Price/Sales is 71% lower than the industry average of 2.35x.
In terms of the trailing-12-month asset turnover ratio, FRFHF’s 0.36x is 66.4% higher than the 0.22x industry average. Likewise, the stock’s trailing-12-month ROTC and ROTA of 8.40% and 3.13% are 48.5% and 175.3% higher than the industry averages of 5.65% and 1.14%, respectively.
FRFHF’s revenue increased at a CAGR of 18.2% over the past three years. Over the same time frame, the company’s EBITDA grew at a CAGR of 157.1%, while its levered free cash flow increased at 103.6% CAGR.
On June 5, FRFHF, in partnership with Kennedy Wilson, acquired an interest of nearly 95% in certain of the real estate construction loans from Pacific Western Bank, a bank holding company based in California. The total purchase for the loans is approximately $2.10 billion, of which Fairfax will fund 95% (nearly $2 billion).
“We are excited to continue our great partnership with Kennedy Wilson, led by Bill McMorrow, and to acquire an interest in a stable and attractive loan portfolio that further strengthens the foundation of interest and dividend income-generating assets that will benefit Fairfax over the next two to three years,” said Prem Watsa, FRFHF’s Chairman and CEO.
FRFHF’s net premiums written by the property and casualty insurance increased 8.4% year-over-year to $6.13 billion in the second quarter that ended June 30, 2023. Its underwriting profit grew 11.9% from the year-ago value to $337.50 million. Its adjusted operating income of the property and casualty insurance and reinsurance operations rose 41.6% year-over-year to $913.50 million.
In addition, the company’s net earnings increased 1,581.7% year-over-year to $829.10 million, and its earnings per share came in at $28.80, compared to a net loss per share of $1.83 in the prior year’s quarter.
Analysts expect FRFHF’s revenue for the fiscal year 2023 to increase 9% year-over-year to $30.58 billion. The consensus EPS estimate of $137.43 for the ongoing year indicates an improvement of 216% year-over-year. Moreover, it surpassed the consensus EPS estimates in three of the trailing four quarters.
Over the past six months, FRFHF’s stock has gained 23.4% and 58.9% over the past year to close the last trading session at $827.59.
FRFHF’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
FRFHF is ranked #3 out of 56 stocks in the B-rated Insurance - Property & Casualty industry. It has an A grade for Stability and a B for Growth, Value, Momentum, and Sentiment.
Beyond what we stated above, we also have FRFHF’s ratings for Sentiment and Quality. Get all FRFHF ratings here.
Heritage Insurance Holdings, Inc. (HRTG)
HRTG, through its subsidiaries, primarily provides personal and commercial residential insurance products. It offers personal residential property insurance, rental property insurance, commercial residential insurance, and personal residential and wind-only property insurance. Also, it provides personal and commercial insurance policies through a network of independent agencies.
In terms of forward non-GAAP P/E, HRTG’s 4.68x is 49.6% lower than the 9.29x industry average. The stock’s forward EV/EBIT multiple of 0.69 is 93.8% lower than the industry average of 11.04. Also, its 0.18x forward Price/Sales is 92.2% lower than the 2.35x industry average.
HRTG’s revenue grew at a CAGR of 9.2% over the past three years. In addition, the company’s total assets increased at a CAGR of 2.9% in the same period.
For the second quarter that ended June 30, 2023, HRTG’s total revenues increased 13.2% year-over-year to $185.31 million. Its gross premiums earned were $330.02 million, up 11.4% from the prior-year quarter. Its operating income came in at $16.39 million, compared to an operating loss of $85.55 million in the corresponding period of 2022.
In addition, the company’s adjusted net income came in at $8.32 million and $0.32 per share, increases of 186.1% and 190.9% year-over-year, respectively.
Street expects HRTG’s revenue and EPS for the fiscal year (ending December 2024) to increase 2.4% and 10% year-over-year to $742.56 million and $1.25, respectively. In addition, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.
Shares of HRTG have gained 27.1% over the past month and 136.4% over the past six months to close the last trading session at $5.32.
HRTG’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
HRTG has an A grade for Sentiment and a B for Growth, Value, and Momentum. It is ranked first in the same industry. Click here to see the other ratings of HRTG for Stability and Quality.
What To Do Next?
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BRK.B shares rose $1.66 (+0.47%) in premarket trading Monday. Year-to-date, BRK.B has gained 14.13%, versus a 15.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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