We recently published an article titled Home insurance premiums skyrocket: The 10 best stocks to buyIn this article, we will look at how Allstate Corporation (NYSE:ALL) compares to other home insurance stocks.

Insurance is one of Warren Buffett’s favorite businesses. So much so, insurance is the largest single revenue generator for Buffett’s company, Berkshire Hathaway. First-quarter SEC filings show that Berkshire posted revenue of $89.8 billion in the first quarter of 2024, of which 27%, or $24.6 billion, came from income from insurance contracts and investments.

It seems like insurance is a pretty lucrative business, and although it sounds boring, insurance is also one of the most dynamic businesses in today’s environment. This is due to climate change, which has led to a growing number of floods, tornadoes, and hurricanes in the U.S. In fact, climate change, along with a number of other reasons, has led to a rise in home insurance costs since the coronavirus pandemic, according to data from the Insurance Information Institute. Between 2020 and 2022, homeowners insurance replacement costs have increased 55% due to increasing natural disasters and high inflation that has made building materials expensive. In fact, cumulative insured losses from hurricanes and convective storms were less than $500 (in 2024 dollars) in 1990. By the end of 2023, they had risen to $5,984 and $5,761, respectively.

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

While these rising homeowners insurance premiums reflect higher business costs, the real picture is more complicated. Like inflation, where prices always rise and never fall, so do insurance premiums. While insurance premiums in the Gulf rose during Katrina, costing at least $55 billion and causing at least nine insurers to go bankrupt, business was booming the following year, 2006. In 2006, home insurers were swimming in profits. Data from AM Best shows that the property and casualty insurance industry raked in $68 billion, representing annual growth of 39 percent. Some, like the U.S.’s 21st-largest insurance company by assets, posted record profits (it earned $5 billion). That same company had earnings per share of $50 at the start of the coronavirus pandemic, then became a loss-making company in 2022. Of course, regulators allowed it to raise its prices by 30%, 20%, and 14.6% in California, New Jersey, and New York, respectively. Now Wall Street has budgeted for this insurance company to have earnings per share of $15 in 2024 and expects it to rise to over $20 in the next few years.

The story continues

Fast forward to the present, and the effects of climate change and inflation may even lead to higher home prices. After fires raged in California last year, several home insurance companies stopped accepting new policies. This leads to higher premiums and hits homebuyers hard as they factor in insurance costs at the end of their purchase decision. And while costs for homeowners and homebuyers may rise due to the tighter insurance market, the industry has continued to struggle in 2023.

Latest data from AM Best shows 2023 was the worst year for the home insurance industry worst loss of this centuryThe sector suffered a whopping $15.2 billion underwriting loss last year, and the ratings agency didn’t mince words when it simply said the reason for the losses was simply a higher number of Americans moving to disaster-prone areas of the South and West. AM Best points out that while the U.S. population grew by 7.4% between 2010 and 2020, the population in the South and West increased by 10.2% and 9.2%, respectively. The magnitude of these losses meant that by 2023, the combined homeowners insurance ratio in 17 American states would be above 100. If you thought these problems were temporary, AM Best also specifically mentioned that “a return to underwriting profitability for the segment is unlikely in the near future.”

The next question to ask when analyzing the state of the home insurance industry in the U.S. in 2024 is: which states are struggling the most? In this regard, the New York Times provides some insight. Their research shows that last year, 18 American states, instead of 17, had a combined ratio of over 100. The leader was Hawaii, which is not surprising since claims from historic wildfire damage exceeded a whopping $3.3 billion—another example of climate-related disasters rocking the insurance industry. After Hawaii, Arkansas was one of the worst-performing regions. The Bear State is notable not only for its combined ratio of over 100 in 2023, but also for a nearly similar ratio in 2022. Severe weather events, including tornadoes, are also a major reason for the difficulties facing the insurance industry in Arkansas.

When you combine the difficulties facing home insurance companies with the changing weather conditions, it’s also important to check whether the same states causing problems for insurers are also seeing the cost of home insurance rise. According to data from Insurify, home insurance premiums have not only increased 20% over the past two years to an average of $2,377 per year, but they’re set to rise another 6% this year. In this growth, Louisiana is expected to lead the way, seeing its premiums rise a whopping 23% this year.

With the climate in the home insurance space changing (figuratively and literally), we decided to find out which home insurance stocks are resonating with analysts.

Our methodology

For our list of the best homeowners insurance stocks, we ranked property and casualty insurance companies, as well as diversified and specialty homeowners insurance companies, by the number of hedge funds that bought their shares in the first quarter of 2024. The specialty and diversified companies were selected to ensure comprehensiveness, and each company was analyzed to ensure it offers homeowners insurance.

Why do we care about the stocks hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (Further details can be found here).

A financial advisor advises a couple and explains the personal finance and insurance products the company offers.

Allstate Corporation (NYSE:ALL)

Number of hedge fund investors in Q1 2024: 59

Allstate Corporation (NYSE:ALL) is one of the largest home insurance companies in America. This means it faces significant risk from climate-related disasters, which could force Allstate Corporation (NYSE:ALL) to not only cover significant claims but also shrink its market by no longer offering home insurance in areas with major weather-related disruptions. At the same time, changing climate patterns also bring a “climate-related element” to the stock price, with moderate weather expectations benefiting shares. Allstate Corporation (NYSE:ALL) shares have been among the top performers among major U.S. insurers this year, having gained 23% year-to-date. Several factors have played a role, including mild weather and Allstate Corporation’s (NYSE:ALL) multi-year strategy of aggressively focusing on customer acquisition. This gives the company an advantage in a market where insurance premiums are rising, while low customer growth could negatively impact the stock price. Allstate Corporation (NYSE:ALL) also benefited from premium increases in the second quarter, with premiums rising to $15.4 billion, representing annual growth of 12%.

Regarding customer acquisition efforts, Allstate Corporation (NYSE:ALL) management made the following statement during the first quarter 2024 conference call:

Total ALL 3rd place on our list of the best home insurance stocks to buy. While we recognize ALL’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for AI stocks that are more promising than ALL but trade at less than 5x earnings, read our report on the cheapest AI stock.

READ MORE: Analyst sees a new $25 billion ‘opportunity’ for NVIDIA and the 10 best stocks to buy in Q3 2024, according to Bank of America.

Disclosure: None. This article was originally published on Insider Monkey.