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5 Top-Notch Insurance Stocks That Have Crushed the Market in 2021

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The insurance industry has performed well this year after a disappointing 2020. The industry has rallied 14% year to date, after declining 5.6% last year. Better pricing, prudent underwriting, increased exposure, streamlined operations, wider global presence and a solid capital position have helped the industry fare well.

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Banking on strong fundamentals and benefiting from favorable macro backdrop, First American Financial Corporation (FAF - Free Report) , Fidelity National Financial Inc. (FNF - Free Report) , American Equity Investment Life Holding Company (AEL - Free Report) , Brown and Brown Inc. (BRO - Free Report) and Aflac Incorporated (AFL - Free Report) have not only outperformed the industry and the Finance sector but have also crushed the market and are well-poised to sustain the bull run next year.

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Despite the optimism, apprehensions regarding the Omicron variant loom large.

What Helped the Insurers Through 2021?

The economy has been growing at a steady pace as evident from the GDP that increased at an annualized rate of 2.3% in the third quarter. Per December Economic Projections of the Fed, GDP in 2021 is estimated to improve 5.5% while the unemployment rate is expected to be 4.3%.

Despite an above-average hurricane season, continued increases in pricing, reinsurance programs, and favorable reserve development helped non-life insurers generate profits. Per Verisk and the American Property Casualty Insurance Association, the net income of private property/casualty insurers improved 54.3% in the first half of 2021. The annualized rate of return on average policyholders' surplus, a key measure of overall profitability, improved 210 basis points to 7.9% while the combined ratio, a measure of underwriting profitability, improved 80 basis points to 96.7 per the report.

Swiss Re Institute estimates global insured losses in 2021 to be $112 billion. Nonetheless, the insurers witnessed improved pricing in all three quarters. Per Marsh, global commercial insurance prices in the first quarter increased 18%, followed by 15% each in the second and third quarter. Per Willis Towers Watson’s 2021 Insurance Marketplace Realities report, except for one, 29 lines should witness a price rise.

Increased awareness following the pandemic continues to support the life insurance business. According to LIMRA's Second Quarter U.S. Individual Life Insurance Sales Survey, the number of policies sold increased 8% in the first half of 2021 — the highest policy sales growth recorded since 1983 as pent-up demand drove sales. Total premium rose 18% per the report.

Solid surplus level and a low-rate environment (helping in borrowing funds at low coupon rate) continue to aid insurers in pursuing strategic mergers and acquisitions to gain market share, expand in niche areas, and diversify operations into new business lines and geography. Per a report from the Deloitte Center for Financial Services, the P&C insurance industry witnessed 197 completed deals in the first half of 2021.

Increased use of technology like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing robotic process automation, Chatbot and RoboAdvisory, insurtech solutions should continue to expedite business operations and save costs.

Can These Stocks Retain the Bull Run in 2022?

Per December Economic Projections of the Fed, GDP in 2022 is estimated to grow 4% while the unemployment rate is expected to be 3.5%, both the metrics better than the September projection. As the insurance industry is an important contributor to the country’s GDP, it is well-poised for growth given the economic expansion.

At its December meeting, two-third of the FOMC members expect at least three rate hikes in 2022, as inflation is expected to rise 2.6% next year. Insurers being the beneficiaries of the rising rate environment are positioned to generate better investment results.

Improved pricing environment should continue through 2022. Per Willis Towers Watson’s 2022 Insurance Marketplace Realities, rates will continue to rise but by a small margin. Better pricing, improved underwriting standards and streamlined operations should continue to fuel premium. Per Deloitte Insights, the life insurance premium is estimated to increase 4%, while non-life insurance premium is anticipated to increase 3.7% in 2022.

Insurers continue to invest heavily in technology to improve scale and efficiencies. Per Deloitte Insights, the technology budget is projected to increase 13.7% in 2022.

Deloitte’s Global outlook survey noted more active M&A strategies in 2022, as more insurers seek growth through expansion.

Picks for Better Return

With the help of the Zacks Stock Screener, we have selected five insurance stocks that rallied this year and are poised to retain the momentum next year. These Buy-ranked stocks have rallied more than 30% year to date and has an impressive track of increasing dividends. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Daytona Beach, FL based, Brown & Brown markets and sells insurance products and services primarily in the United States, as well as in London, Bermuda, and the Cayman Islands. This Zacks Rank #2 (Buy) broker boasts five-year total shareholder returns of 205%, much above its peer group and the S&P 500.

Improving new business and continued rate increases for most lines of coverage are likely to help in delivering an improved top line, which witnessed a 10-year CAGR of 10% and exceeded the peer average and the S&P 500. Strategic investments to drive organic growth, and improve efficiency and margin bode well.

In its efforts to return value to shareholders, Brown and Brown has been increasing dividends for the last 28 years. It has $323.6 million remaining under its share buyback authorization.

The Zacks Consensus Estimate for 2022 earnings suggests 5.1% year-over-year growth on 8% higher revenues. The consensus estimates have moved up by a cent in the past 30 days.

Improving commission and fees, strong liquidity and effective capital deployment continue to drive Brown and Brown, which beat earnings estimates in each of the three reported quarters of 2021.

Santa Ana, CA, based First American Financial is a leader in the Title and Settlement Services Industry, holding 23.3% of the Title market share. The title insurer currently carries a Zacks Rank #2.

Increased demand among millennials for first-time home purchases, an improved rate environment, and strength in commercial business position First American well for growth.

In its efforts to return value to shareholders, First American has been raised dividends at an eight-year (2013-2021) CAGR of 19.8% and has $463 million remaining under its share buyback authorization.

The bottom line of First American beat earnings estimates in all the three reported quarters of 2021. The Zacks Consensus Estimate for 2022 earnings has moved up 3 cents in the past 30 days. FAF is well-poised for progress, as is evident from its impressive VGM Score of A.

Jacksonville, FL-based Fidelity National Financial, which sports a Zacks Rank #1, provides various insurance products in the United States.

Being the nation’s largest title insurance and settlement services company, Fidelity National has a leading market share in the residential purchase, refinance, and commercial markets and industry-leading margins.

Fidelity National should continue to witness momentum in refinance volumes, strong purchase demand and rebound in commercial real estate activity given the still low-rate environment.

Riding on a solid capital position, Fidelity National has been hiking dividends for the last 10 years.

The bottom line of Fidelity National beat estimates in all the three reported quarters of 2021. The Zacks Consensus Estimate for 2022 earnings has moved up 4.6% in the past 30 days. FNF is well-poised for progress, as is evident from its impressive VGM Score of B.

Columbus, GA-based Aflac offers voluntary supplemental health and life insurance products and operates through Aflac Japan and Aflac U.S.

Aflac’s Argus buyout will provide it with a platform to build the Zacks Rank #2 company’s network of dental and vision products and strengthen its U.S. segment further. Product development, online or digitally-assisted sales and specific sales efforts on the Japan Post platform will bolster long-term growth.

In its effort to save costs, Aflac offered a voluntary separation plan to eligible employees, which will reduce its U.S. insurance and corporate workforce by approximately 9%. The company expects run-rate annual savings in the range of $45 million to $50 million.

Aflac has been growing dividends consistently for the past 39 consecutive years.

Aflac delivered earnings surprise in all the three reported quarters of 2021. The expected long-term earnings growth rate is pegged at 5%, better than the industry average of 4.9%. AFL carries a favorable VGM Score of B.

Incorporated in the state of Iowa, American Equity Investment Life Insurance Company, is a leader in the development and sale of fixed index and fixed rate annuity products. The company sports a Zacks Rank #1.

American Equity’s target market includes individuals in the age group of 45-75, seeking to accumulate tax-deferred savings or create guaranteed lifetime income. With fixed index and fixed rate annuity products guarantying principal protection, competitive rates of credited interest, tax-deferred growth, guaranteed lifetime income and alternative payout options, American Equity is poised to benefit from this demography. The company targets sales between $5 billion and $6 billion in 2021.

This premier fixed index annuity producer in the independent agent channel remains focused on expanding into middle market credit, real estate, infrastructure debt, and agricultural loans. To that end, it announced its intention to join forces with Adams Street Partners and form a management company joint venture for co-developing insurer capital-efficient assets with secured first-lien middle market credit with an initial $2 billion of invested assets. The company believed its mix of fee revenues would support a higher-return business profile.

Since the company went public in 2003, American Equity has increased dividends each year for straight 17 years. It generated an average operating return on equity of 15% over the past years and targets between 11% and 14% over the next few years and above 15% on average over the long term.

The Zacks Consensus Estimate for 2022 earnings indicates 52.1% year-over-year growth on 6.4% higher revenues.

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