Top 3 Insurance Stocks That Generate High Returns on Premium Income
Insurance names are often among the lists of long-term dividend growth stocks and these three are worth a look.
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Income investors looking for quality businesses for long-term dividend growth should consider insurance stocks.
Insurance companies have an attractive business model. They collect premium income on the policies they underwrite, and also make money by investing the large sums of accumulated premiums that have not been paid out as claims.
Due to this, many insurance stocks can be found on the various lists of long-term dividend growth stocks, such as the "Dividend Aristocrats" and "Dividend Kings."
The following three insurance stocks have solid dividend yields and long-term dividend growth potential.
1. Lincoln National (LNC)
Lincoln National Corporation LNC offers life insurance, annuities, retirement plan services and group protection. The corporation was founded in 1905 as The Lincoln National Life Insurance Company.
Lincoln National reported fourth quarter and full-year 2023 results on February 8, 2024, for the period ending December 31, 2023. Adjusted income from operations equaled $1.45 per share compared to $0.76 in the same prior-year period.
Additionally, annuities average account balances rose by 4% to $147 billion and group protection insurance premiums grew 3% to $1.3 billion. Book value per share (including adjusted income from operations) surged 43% year-over-year to $34.81.
Following Lincoln’s Fortitude Reinsurance deal, and the announcement of its Osaic deal, the company has laid out the long-term outlook for its target operating income earnings mix.
It is targeting for annuities to account for 45% to 55% of its earnings mix, group to account for 25% to 35%, retirement to be 5% to 15% and life to make up the remaining 5% to 10%. This means Lincoln will be reducing its exposure to annuities while increasing its exposure to group and life, with retirement remaining in its current range.
LNC’s dividend appears to be in safe territory with an expected payout ratio of 27% for 2024, but LNC is not recession resistant and could face headwinds from a slowing economy. The company lists its automated underwriting within a defined criterion, and its LincXpress product, a simplified issue process, as marketplace competitive advantages.
LNC stock currently yields 5.6%, making it a high-dividend stock.
2. The Hartford Financial Services Group (HIG)
Hartford HIG is a diversified insurer that offers a diverse range of property and casualty (P&C) insurance, group benefits and mutual fund services to a customer base of individuals and corporations in the United States, and internationally.
On July 25, 2024, Hartford Financial released its second quarter 2024 results for the period ending June 30, 2024. For the quarter, the company reported net income of $733 million ($2.44 per diluted share), which represents a 35% increase compared with net income of $542 million ($1.73 per diluted share) in the same quarter of 2023.
Reported core earnings for the same periods were $750 million ($2.50 core earnings per diluted share) and $588 million ($1.88 core earnings per diluted share), which represents an increase of 28% year over year. The quarterly results benefited from strong performances in the Commercial Lines, Personal Lines and Group Benefits businesses.
The Property & Casualty (P&C) segment demonstrated robust growth with written premiums increasing by 12%, driven by both Commercial and Personal Lines, which grew by 11% and 14%, respectively. Written Personal Lines premiums reached $913 million, marking a 14% increase compared to the second quarter of 2023.
Hartford Financial has grown earnings by 13.1% per year since 2014 and 12.5% over the past five years. We expect Hartford Financial to grow its earnings-per-share by 8% per year on average over the next five years, mainly driven by commercial lines premium growth, assisted by optimizing costs and rising yields. EPS growth will also be fueled by share repurchases. The company also announced a new $3.3 billion share repurchase program, effective from August 1, 2024, through the end of 2026.
Hartford Financial has a long history of paying dividends and has 14 consecutive years of annual dividend increases. With the current payout ratio of 20%, HIG’s dividend payments are well covered by earnings.
Given the expected earnings growth, there is still room for the dividend to continue to grow moving forward while maintaining a payout ratio below 30%.
3. American Financial Group (AFG)
American Financial Group AFG is an insurance holding company that is engaged in property and casualty insurance, focusing on specialized commercial products for businesses. In 2021, the company completed the sale of its annuity business for $3.8 billion in cash.
AFG reported Q2 2024 earnings on August 6, 2024. For the quarter, earnings-per-share was $2.49, above the $2.34 per share that the company reported for the same period in 2023. During the quarter the company paid $0.71 per share in regular quarterly dividends.
Annualized core operating return on equity was 18.5% for the second quarter, and increased investment income as a result of the strong underwriting margins and higher interest rates. The company’s book value per share stands at $52.25, and the company’s growth of book value plus dividends during the quarter stood at 4.7%.
While the above market average growth of their earnings and dividends will likely slow in the next few years, we still expect the company to be able to outperform as a result of AFG’s profitable specialty insurance business. The specialty insurance business should have more growth opportunities than the consumer facing insurance segments. As a result, we expect earnings to grow 8% annually until 2029.
Additionally, the sale of the annuities business also helps the company focus on its more profitable property and casualty insurance divisions, which have better growth prospects and more reliable earnings. Overall, the quarterly dividends are well covered by the company’s earnings and are unlikely to be cut anytime soon.
AFG stock pays regular quarterly dividends of $0.71 per share, or $2.84 per share annualized. AFG also pays special dividends on occasion. The regular dividend results in a current yield of 2.0%.
At the time of publication, Ciura had no positions in any securities mentioned.