My Top Insurance Picks In Early 2024

Long ago, Warren Buffett made me enthusiastic about the insurance industry and it has remained my biggest allocation. Insurance companies are not popular on SA except for Berkshire Hathaway (BRK.A) (BRK.B). They appear boring to many readers, one can hardly expect fireworks from them, and accounting is a must to understand an insurer. But they have worked quite well for me over many years.

The table below represents my current insurance holdings ranked in the order of position size. The table does not include my big holdings of BRK and Apollo (APO), both of which have giant insurance subsidiaries.

Over the years, I also held 3-4 other insurance names which I eventually sold. Importantly, none of them was a flop but I became less hopeful they would beat the index over the long term. For me, this is the ultimate criterion and I am holding only companies that I believe can beat the index. Everything else, including yield (several companies in the table are high-yielders), is secondary.

The annualized IRRs presented in the table are meaningless for holding periods of significantly less than a year. Since there are many names in the table, I will limit myself to succinct comments on each of them.

This is my biggest position due to the stock’s incredible appreciation and despite my occasional selling. I posted about it several times (here is the latest post) and may post again after its earnings call this February.

In short, Trisura is a story of incredible growth in specialty P&C lines both in the US and Canada interrupted by a bad underwriting mistake a year ago.

For a relatively small company even a single mistake matters. It caused a big write-off and left investors guessing whether it was a one-off or systemic negligence. 2023 was a bad year for the stock but it started recovering in early 2024 and is trading now only ~20% below its all-time high.

I did not sell into the weakness and remain hopeful. The company keeps growing fast and trades rather inexpensively for its growth rates. Of all the stocks in the table, I consider Trisura the riskiest and the most promising insurance pick at the same time.

The Progressive Corporation (PGR)

My latest bullish post on it was almost two years ago and the stock has delivered handsomely since. PGR is the most expensive stock on my list. Its P/B is routinely above 3 which is very high for an insurer.

The correct metric to value the stock is P/Adj.E, where earnings need to be adjusted at least for net realized gains/losses and goodwill impairments. I also adjust earnings to normalize underwriting margins.

The resulting trailing P/Adj.E has always been above 20 over the last several years. For example, it was 21.3, 20.5, and 22.1 for 2020-2022 respectively (I do not have full data for 2023 yet). When it goes below 20, it is a buy. I used one of these periods of relative weakness to build my position. In several ways, PGR is unique.

First, its main market is personal auto which is mandatory in the US. It is a rare privilege to be one of the biggest (probably, the second biggest at the time of writing) and the fastest-growing company in the market guaranteed by the US government.

Secondly, PGR is managed better than its competitors. We have several pieces of evidence to support this statement. We know that PGR is winning against BRK’s Geico in both growth and profitability. Warren Buffett himself has admitted it multiple times.

Initially, 2023 was rather challenging for PGR (its combined ratio was higher than 100% at certain points) due to the confluence of several factors with inflation being the main one. The company had to pull several levers such as upping its rates and reducing advertising to reverse this trend. The final combined ratio was ~95%, below the 96% that PGR is committed to. Please note that PGR accomplished this mid-year U-turn without sacrificing its growth!

Thirdly, PGR is successfully scaling up supplementary insurance lines. The company is firmly profitable in commercial auto (it is #1 in this segment) and is growing its homeowners’. The latter is still relatively small and barely profitable in 2023 (it was losing money in previous years). But its contribution may become palpable several years from now. Further progress in homeowners’ should also improve the company’s combined ratio.

Fourthly, PGR is the undisputable leader in risk selection. It started monitoring individual driving and offering individual insurance rates long before AI became a household term. Today it has more data about individual driving habits than any other big auto insurer and can leverage this data in training its AI models.

Overall, PGR is a superior company but its price more often than not reflects it. One has to be very selective in finding the right moment to buy it.

Cigna (CI)

Cigna is a health insurer attractive because of two features:

1. Due to perennial uncertainties regarding the single-payer healthcare system, particularly during an election year, it is often trading ridiculously low. In my publications about Cigna (here is the last post), I explained why the US is unlikely to adopt a single-payer system. This is true about all health insurers, but in the case of Cigna, it is exacerbated by the fact that it also houses the biggest pharmacy benefit manager (“PBM”). The government and various activist groups are on a mission to find somebody to blame for high medication prices and PBMs are possible but doubtful culprits. It is easy to buy Cigna for cheap.
2. Meanwhile, the company is quickly growing, generates ample free cash flow, and uses it primarily for buybacks. At the end of 2019 (when Cigna acquired its PBM Express Scripts partially by issuing shares), it had ~380M of shares outstanding. The latest count is ~297M. Due to these relentless buybacks, Cigna shareholders should be happy to see shares trading low.

The best metric to judge Cigna’s performance is its adjusted EPS which is, for most years, equal to GAAP EPS plus purchase accounting amortization. This metric, on average, is growing at high teens.

UnitedHealth (UNH)

This is another superior company on par with or better than PGR. Similarly to the latter, it is usually expensive. Still, election years present some limited opportunities to buy it at reasonable prices. For UNH, “reasonable prices” means, in my opinion, anything close to 20 for P/Adj.E. The latest opportunity to buy UNH occurred this year on January 25th and lasted 2-3 hours.

UNH appears synonymous with US healthcare which has grown higher than GDP for many years. UNH is much bigger than any other health insurer and well-diversified across many facets of the US healthcare system. Short of unlikely reform of the US healthcare, the company should continue its superior growth.

F&G Annuities & Life (FG)

It was my most successful buy of 2023 among all stocks – just check the table. For many years, I was reluctant to buy into the Life subindustry. Life companies’ earnings are highly dependent on complicated and non-transparent accounting. Differently from P&C companies, they are also subject to surrender risks that are similar to bank runs.

I changed my opinion after studying Apollo’s Athene. Athene’s track record has proved that fixed annuities combined with alternative investments can generate high and stable ROE. I bought F&G after I discovered that it is following Athene’s recipes.

My last publication about F&G is still quite fresh and I will refer to it for details.

The stock was the subject of my most recent post and I do not see a reason to repeat myself. But I want to comment on the Financial Times’ “Legal & General Faces Pivotal Moment under New Boss” which appeared at the very end of 2023 and was slightly critical of the company’s strategy. Let me quote it:

However, analysts say he [the previous CEO who just quit] is leaving behind a group that is being shunned by some investors because of its credit exposure at a time of rising interest rates and its strategic focus on the capital-intensive business of taking over corporate pension obligations through so-called bulk annuity deals. Even insiders are keen for the next big idea.

I am skeptical about this critique. First, the PRT (pension risk transfer or group annuities) business is very lucrative while it lasts and LGEN is the biggest UK actor in the segment. Secondly, while it is true that this business will exhaust itself sooner or later, it will not happen tomorrow. The company has at least several years to prepare for eventual changes. It should be sufficient to fix LGEN’s asset management business and grow its alternative investments. Both lines are not capital-intensive. Finally, the eventual fading of the PRT business should release capital to fund retail annuities business and buybacks.

Fidelity National (FNF)

FNF is a title insurance par excellence but it also owns 85% of F&G. I published about it very recently and little has changed, in my opinion, except that the stock is almost 15% higher than at the time of my publication.

FNF is the only cyclical stock in the table and it should be successful when interest rates start to decline. It may or may not happen shortly but it will happen. Please note, that Q4 may be quite poor for the company. First, the rates remained high during Q4. Secondly, the cyberattack caused FNF systems to shut down in Q4 for about a week. The company lost a lot of orders because of it. Both issues are temporary and if the stock declines after the Q4 earnings call, it may represent a buying opportunity.

American Financial Group (AFG)

Here is my last post about the company. it is my only insurance holding that is losing against the index. But I am still hopeful because of simple arithmetic.

AFG is growing its earnings at about 12% and keeps increasing its regular dividends at a similar rate. The company also pays ample special dividends typically twice a year. The combined yield of both special and regular dividends is 6-7%. It means that AFG should generate total returns in the high teens which is comfortably above ~10% for the index.

My actual returns with AFG are better than the ones indicated in the table. Besides AFG shares, I also write covered calls (and hold additional shares against them) that have generated about 14-15% annualized returns.

Chesnara (CSN.L) (OTC:CSNRF)

Chesnara is a small UK Life company that I published about two years ago. The table indicates meager returns for the stock but it is primarily due to USD appreciation vs GBP. In constant currency, the returns were about 6-7%.

Chesnara’s call to glory comes in the form of a high dividend yield (close to 9% currently) that grows at 3% annually. Based on the company’s filings this dividend is sustainable, qualified for US tax purposes, and free of withholdings.

Of all my insurance picks, I am least optimistic about Chesnara. Its strategy is to acquire run-off policies from other life insurers. While the strategy is profitable and not particularly risky, it is very limited in its potential.

In my opinion, Chesnara can deliver outsized returns only if it becomes an acquisition target which is possible in today’s environment.

Protector is a small Norwegian P&C company that, to the best of my knowledge, does not have an ADR in the US. It has been around and extraordinarily successful for about a decade. However, its stock has been gyrating wildly. Until recently, it was operating only in smallish Scandinavian markets.

I have been reading about the company for several years but opened my position only recently due to a simple consideration. A couple of years ago, Protector entered the UK and started repeating its typical success with superior underwriting and fantastic growth. For the first time in its history, the company is operating in a big market with virtually no limit for growth.

My position is still tiny and I am looking forward to an opportunity to increase it.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.