Is The Progressive Corporation (PGR) the Best Homeowner’s Insurance Stock To Buy?

We recently published a piece titled Homeowner’s Insurance Rates Skyrocketing: 10 Best Stocks To Buy. In this article we are going to take a look at where The Progressive Corporation (NYSE:PGR) stands against the other homeowner's insurance stocks.

Insurance is one of Warren Buffett’s favorite businesses. So much insurance is the single largest revenue contributor to Buffett’s firm, Berkshire Hathaway. Its first quarter SEC filings show that Berkshire earned $89.8 billion in revenue during Q1 2024, out of which its insurance underwriting and investment income accounted for 27% or $24.6 billion in revenue.

Seems like insurance is quite a lucrative business, and even though it sounds boring, insurance is also one of the most dynamic businesses in today’s environment. This is because of climate change, which has led to a growing number of floods, tornadoes, and hurricanes in the US. In fact, climate change along with a slew of other reasons has led to soaring home insurance costs since the coronavirus pandemic, according to data from the Insurance Information Institute. Between 2020 and 2022, replacement costs for homeowners insurance have soared by 55% because of increasing natural disasters and high inflation which has made construction materials expensive. In fact, cumulative insured losses from hurricanes and convective storms sat below $500 (in 2024 dollars) in 1990. As of 2023 end, these had jumped to $5,984 and $5,761, respectively.

These rising costs have also hit the home insurance industry hard. Insurance companies’ profitability is measured through the combined ratio, which is the sum of an insurer’s costs and payouts divided by the premiums collected. Naturally, a value below 100 reflects profitability, and from 2020 to 2023, the net combined ratio which also accounts for reinsurance sat at 107.3%, 103.4%, 104.7%, and 110.9% for each of the years, respectively. The value for 2023 was the worst since 2011, and it came at a time when home insurers increased their premiums by 12% – for the highest increase in 15 years. Since 2012 and 2021, the average premiums have grown by $1,034 to $1,411.

While these rising home insurance premiums reflect the higher cost of doing business, the real picture is more complicated. Like inflation, where prices always go up and never come down, the same is the case for insurance premiums as well. While insurance premiums rose in the Gulf Area during Katrina, costs were at least $55 billion, and at least nine insurers went bankrupt, business was booming the year after in 2006. In 2006, home insurers bathed in profits, with data from A.M. Best outlining that the property and casualty industry raked in $68 billion for a 39% annual growth. For some, like the 21st largest insurance company in the US by assets, their profits were a record high (it earned $5 billion). The same firm had an earnings per share of $50 early during the coronavirus pandemic and then it became a loss making entity in 2022. Naturally, regulators allowed it to increase its prices by 30%, 20%, and 14.6% in California, New Jersey, and New York. Now, Wall Street has penciled in an earnings per share of $15 for this insurance company in 2024 and expects it to grow to more than $20 in the next couple of years.

Fast forwarding to the current day, the effects of climate change and inflation can even translate into higher home prices. After fires raged through California last year, several home insurance companies stopped taking new policies. This leads to higher premiums and ends up affecting home buyers hard since they factor in the insurance cost at the end of their buying decision. And while homeowner and home buying costs might rise due to the tighter insurance market, the industry continued to struggle in 2023.

A.M. Best’s latest data reveals that 2023 was the worst year for the homeowner’s insurance industry for the worst loss this century. The sector suffered from a whopping $15.2 billion underwriting loss last year, and the rating agency didn’t mince its words when it simply stated that the reason behind the losses is simply a higher number of Americans moving to the disaster prone areas of the South and the West. A.M. Best outlines that while the US population grew by 7.4% between 2010 and 2020, the population in the South and the West jumped by 10.2% and 9.2%, respectively. The scale of these losses meant that in 2023, the combined ratio for homeowner insurance was higher than 100 in 17 American states. If you thought that these troubles were temporary, A.M. Best was also careful to mention that “a return to underwriting profitability for the segment over the near term is unlikely.”

The next question to ask when analyzing the state of the home insurance industry in the US in 2024 is, which states are experiencing the most trouble? On this front, the New York Times provides some insight. Its research shows that instead of 17, 18 American states had a combined ratio greater than 100 last year. Leading the pack was Hawaii, which is unsurprising given that the claims from historic wildfire losses exceeded a whopping $3.3 billion – for another instance of climate related disasters disrupting the insurance industry. After Hawaii, one of the worst performing regions was Arkansas. The Bear State is notable not only for its combined ratio being greater than 100 in 2023 but also for having a near similar ratio in 2022. Severe weather events, including tornadoes, are also a key reason for the struggles that the Arkansas insurance industry is facing.

Combining the difficulties that home insurance companies are facing with the shifting weather patterns, it’s also relevant to check whether the same states that give insurers trouble are also witnessing an increase in homeowner insurance costs. According to data from Insurify, not only have homeowners insurance premiums jumped by 20% over the past two years to sit at $2,377 annually on average, but they will grow by an added 6% this year. Within this growth, Louisiana is expected to lead the pack and see its premiums jump by an eye watering 23% this year.

So, as home insurance faces a changing climate (figuratively and literally) we decided to see which home insurance stocks are finding favor from analysts.

Our Methodology

For our list of the best home insurance stocks, we ranked property and casualty, diversified, and specialty home insurance companies by the number of hedge funds that had bought their shares in Q1 2024. The specialty and diversified firms were chosen to ensure completeness, and each firm was analyzed to ensure that it offered home insurance.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A team of accountants in a boardroom, discussing strategic moves of an insurance company.

The Progressive Corporation (NYSE:PGR)

Number of Hedge Fund Investors  in Q1 2024: 85

The Progressive Corporation (NYSE:PGR) is another mega insurance provider, and also one that has successfully managed the headwinds the industry has been facing. Like other insurers, it was forced to raise its premiums in 2023, but unlike others, The Progressive Corporation (NYSE:PGR) chose to bite the bullet and reduce its costs at the same. This paid off when the claims dropped this year, as the sticky higher premiums coupled with lower costs boosted The Progressive Corporation (NYSE:PGR)’s margins. In fact, despite the lower market spending, The Progressive Corporation (NYSE:PGR)’s Q1 policy in force grew by 7.1% to $30.8 billion. The effectiveness of its management is also reflected in the share price, as PGR’s shares are among the top year to date performers in our list. They are up by 33% year to date. The Progressive Corporation (NYSE:PGR)’s premiums jumped by a strong 19% annually during Q2 and its combined ratio sat at 91.9%, which not only indicated profitability but was also higher than the previous reading of 100.4%.

Artisan Partners mentioned The Progressive Corporation (NYSE:PGR) in its Q1 2024 investor letter. Here is what the firm said:

“Progressive Insurance shares rose 30% during the quarter. After a difficult start to 2023, the company quickly adapted and finished the year with impressive growth in premiums and underwriting profits. In Q4 2023, it managed to grow its customer base even as it raised rates and improved its underwriting ratios—a trifecta that isn’t often seen in the insurance industry. This performance has continued, which should set the stage for another year of good results in 2024. Perhaps most importantly, it has been able to navigate the environment far better than its peers, many of whom are still reporting sub-par underwriting performance. Progressive has consistently gained market share in the personal auto market over our ownership period and now commands close to 15% of the total market. Its shares are no longer a bargain, but we continue to hold them due to the high quality of this business and the advantaged nature of its low-cost insurance franchise.”

Overall PGR ranks 2nd on our list of the best homeowner's insurance stocks to buy. While we acknowledge the potential of PGR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for AI stock that is more promising than PGR but trades at less than 5 times its earnings, checkout our report about the cheapest AI stock.

 

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Disclosure: None. This article is originally published at Insider Monkey.