Insurance isn’t a terribly exciting business, but there’s no doubt that insurance stocks have held up quite well in recent years. In the last three years, the S&P Insurance ETF beat up S&P 500with a return of 71.3% compared to 64.8%.

Insurance stocks can make difficult investments because the insurance business sees a steady flow of demand during periods of economic growth or inflation. However, no insurance stocks will do. One thing I look for from top insurers is a track record of stellar profits and a business that can weather tough times.

progressive (Pgr 0.20%) And Marsh and McLennan (MMC 0.70%) Has a proven history of success through various recessions. Kinsale Capital (KNSL -0.61%) So far has a short but successful history and excellent prospects. Here’s why these three insurance stocks look like attractive buys in April

Progressive drives ahead of the competition

Progressive Insurance writes policies and covers mainly automotive insurance but also has a small property insurance business. Progressive has long dominated the broader insurance market with its excellent underwriting capabilities.

Its secret sauce is long-term use of telematics or driver behavior data to price its policies. Progressive introduced telematics on a limited basis in 2004, making it widely available to consumers through its Snapshot product in 2010. By collecting various data points on driving speed, break time and mileage driven, Progressive can define its risk and pricing policies to perfection.

An important metric used to evaluate an insurance company is the combined ratio. This ratio of expenses to claims paid, divided by the total premiums taken, is expressed as a percentage. A ratio below 100% means an insurer is writing a profitable policy. Over 21 years, the combined proportion of progressives averaged 91.6%. The property and casualty (P&C) insurance industry average is close to breakeven at 99.9%.

A chart shows Progressive's combined ratio versus the industry average over 21 years.

Data Source: Progressive Regulatory Filings and National Association of Insurance Commissioners. Chart by author.

The insurance industry is highly competitive, and Progressive’s True to Driver data has allowed it to dial in its pricing model — keeping it head and shoulders above the competition.

Last year, it quickly adapted to rising costs of repairing and replacing vehicles and implemented price increases to maintain a profitable policy. While the industry average combined ratio climbed to 102.7% last year, Progressive’s combined ratio was an impressive 95.8%.

Progressive has also performed across economic cycles, beating the market in the past three recessions, making this insurer a tough buy today.

Marsh & McLennan helps clients navigate challenging times

Marsh & McLennan advises companies on strategic and operational issues and thrives in uncertainty. It has become a trusted advisor to clients seeking advice on workplace strategy, compensation and benefits, environmental issues and navigating challenging economic conditions. It advises clients on risk management and insurance purchase. Its consulting businesses accounted for 39% of its total revenue last year, with risk and insurance making up the rest.

Marsh & McLennan connects clients with insurance companies and earns commissions for making these connections. In times of growing economy and inflation, rising insurance prices help it earn higher commissions and grow this segment of the business.

Global insurance prices continued to rise last year and the fourth quarter marked the 21st consecutive quarter of insurance price increases. Overall, its risk and insurance business revenue rose 5% last year.

Marsh & McLennan’s business is relatively asset-light, with good margins and solid cash flow generation. Last year, its free cash flow, or cash left over after paying off operating expenses and capital equipment, was about $3 billion.

A chart shows Marsh & McLennan's free cash flow since 2010

Image source: Marsh and McLennan.

Marsh and McLennan have done a solid job across economic cycles. CEO Dan Glaser said the firm has increased its earnings per share in every recession since 1962 and said, “When the world is in turmoil, demand for our services increases.”

Because of its trusted advisor position, solid cash flow, and long-term performance, Marsh & McLennan is another solid insurance stock to consider buying today.

Kinsale Capital has been very successful in its short history

Kinsale Capital writes policies on hard-to-cover risks that traditional insurers won’t cover. This niche market within the P&C industry is called excess and surplus (E&S) insurance.

As its name suggests, this insurance goes above and beyond traditional insurance policies, including professional liability, small business, product and professional liability coverage. E&S insurance can be very profitable because companies have more flexibility in the types of policies they cover and how they price those policies. As a result, E&S insurers compete on knowledge and expertise, not price.

Kinsale has done a great job of building its homegrown platform, allowing it to leverage technology and years of data and experience to focus on more profitable opportunities. Since going public in 2016, Kinsale’s combined ratio has averaged 81%. Its years of outperformance are a testament to its technology platform and management’s ability to identify and capitalize on high-profit opportunities.

Since 2016, Kinsale has crushed the S&P 500. It has a shorter history compared to the above two insurance companies, so it remains to be seen how it will perform in tough times. However, its stellar performance over its young history makes it a solid insurance stock worth buying today.

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