5 Undervalued Insurance Stocks With High Dividend Yields and Low Payout Ratios

Insurance stocks are among the most intriguing options in this market. Among the most stable and consistent long-term bets, insurance companies are highly sought after by long-term investors.

Insurance starts with a bet. A customer bets on a disaster that he will die, or his car will crash, or his business will be destroyed by a natural gas leak, like my late father’s television repair business was in 1967. If a catastrophe occurs, the client “wins” and is made whole, to the limits of politics. (Dad’s shop reopened shortly after his loss.)

If nothing happens, the insurer keeps the customer’s money and offers to play again with new odds and a new price. The biggest disasters cause insurers to raise their rates, but by carefully managing risk, they make sure it doesn’t hit them too hard.

Insurance has been essential to doing business since Lloyd’s of London was a café in the 17th century. Without a way to manage risk, significant risks cannot be taken. The larger an insurer, the greater the risks it can take. But even the largest insurers will offload layers of risk onto other companies through “reinsurance”. No insurance stock is isolated.

That said, here are the top five insurance stocks that I think are worth investigating right now.

Lincoln National (LNC)

First on this list of insurance stocks is Lincoln National (NYSE:CNL), a life insurance company offering annuities and retirement planning. This business model allows Lincoln to keep more customers’ money longer than an insurer offering only term life insurance policies.

If you’ve heard of the company, it’s probably because of their sponsorship of the Philadelphia Eagles stadium. The Eagles lost the Super Bowl. However, Lincoln Financial is also among insurance stocks on a losing streak.

This is because its business model makes it more dependent than other insurers on investment returns. In 2022, Lincoln’s returns were in the red, with the company losing $2.2 billion on revenue of $19 billion. Lincoln accelerated its decline, taking a one-time accounting charge that sent the stock sinking after the release of its third-quarter report.

But that was unusual, and Lincoln maintained its dividend of 45 cents a share. This yields more than 6.5% to current shareholders.

While Lincoln stock is down 20% in the past three months and 14% in the previous five years, smart hedge funds are buying it now. They know that a better market will translate into positive earnings and a higher stock price, which will make today’s dividend even more valuable. Lincoln’s market capitalization is currently less than one-fifth of its annual revenue.

It’s a long game. You buy it on weakness, like now, and let the dividends keep you warm until the market realizes that a big insurer can’t lose forever.

First American Financial (FAF)

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America’s first financial (NYSE:FAF) is in the real estate insurance business. It offers title insurance, handles real estate appraisals and transaction documents, and conducts inspections. Last quarter, the company earned $54 million, or 52 cents per share, on revenue of $1.7 billion. The company also lost $114 million on its investments.

Over the past year, shares have fallen nearly 19%, pushing the company’s dividend yield from 52 cents per share to 3.8%. This is all in line with the rest of the industry.

The recent fall in early Americans is due to the affordability of real estate. Rising interest rates aren’t just for buyers who pay more. It also means sellers often forgo low-interest loans. There are fewer transactions, therefore less demand for FAF services. Private equity buyers also use cash, which further reduces FAF’s needs. Last year, revenues fell almost 20% compared to 2021 and net profit by almost 80%. Operating cash flow, however, fell only 40% to $780 million. The company’s cash held steady at just over $1.2 billion.

While some hedge funds have sold their FAF shares and some analysts have abandoned ship, Keefe, Bruyette & Wood continue to believe. Management also believes in its model, deciding to keep its payout of 52 cents, despite declining earnings.

Allstate (ALL)

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You know Allstate (NYSE:ALL) because it’s in the personal property and casualty business. The company sells auto and home insurance policies, competing with companies such as GEICO of Berkshire and progressive (NYSE:RPG). Prior to the recent bank bailout panic, its stock was up for the year. It still leads the S&P 500.

That said, in 2022 the company lost $1.4 billion, or $5.22 per share, on revenue of over $51 billion. Revenue increased by 10%, but its losses were also greater. For every $1 in bonuses, 95 cents went to customers. The “combined loss ratio” for the previous year, as the company calls it, was 86. Like the rest of the industry, Allstate also had less investment income. Despite these factors, the company increased its dividend to 89 cents per share, translating into a yield of 2.9%.

Allstate was doing well until rising auto repairs and medical bills sent losses skyrocketing. Its statutory surplus shrunk by more than $6 billion to $12.2 billion. This means it can remain a cheap stock. The company is suspending share buybacks.

Management does not expect his bad luck to continue. Just to make sure rates go up, especially on reinsurance lines that only kick in when losses have already become extreme. These are up 45-50%. Allstate management says this year it is focused primarily on earnings and less on growth.

Reinsurance Group of America (RGA)

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In reinsurance, you don’t take the first dollar of loss or sell a policy. You only pay if someone suffers an extreme loss.

No insurer wants to take a billion dollar hit, so such risks are layered, with multiple companies often covering a $100 million loss. You may have never heard of Reinsurance Group of America (NYSE:RGA). His name is only essential to your insurance company.

RGA stock has appreciated 32% over the past year. It was an unusual year. Over the past five years, stocks have fallen almost 20%. RGA was part of many portfolio managers’ “rush to safety” after years of chasing growth. As with most other insurance stocks, you buy RGA primarily for its dividend, which was recently increased to 80 cents per share. In 2018, it was only 50 cents.

For all of 2022, RGA reported net income of $623 million, or $9.31 per share, on revenue of $15.9 billion. A look at his earnings release shows how all the moving parts fit together. The company offset its loss in the United States with profits from Canada, for example. Some currency headwinds should ease this year. This is why the dividend has increased, and Citigroup (NYSE:VS) recently updated the stock.

UnitedHealth Group (UNH)

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To complete this list of insurance actions is UnitedHealth Group (NYSE:A H). Indeed, UnitedHealth may be one of the best companies I don’t have in my retirement portfolio. But I’ve been a fan for years.

United dominates the health insurance space, evolving from a pure insurance model to a managed care model.

With insurance, you bet on health and pay for the losses. In managed care, you bear the costs and strive to minimize them. This is why health checks and cheap generic drugs are now part of many policies. If a managed care company can manage your chronic conditions and keep you out of the hospital, that’s a win.

United do this because they were an early adopter of technology through their Optum unit. She has her own “drug benefit manager,” which helps her keep drug costs down. He gets a sizable chunk of the highly profitable Medicare Advantage business through his ties to AARP, the senior citizens’ lobby.

Last year, United reported earnings of $20 billion, or $22.19 per share, on revenue of $324 billion. Profits increased by 16% and revenues by approximately 12.5%. The dividend of $1.65 per share only returns 1.4% to current shareholders. If that sounds modest, the stock’s value has doubled in the past five years, though it’s down 12% in 2023.

This is the miracle of insurance. You can always find new ways to make money, even if you gradually change the business model to meet market needs.

As of the date of publication, Dana Blankenhorn held a long-standing position with the AAPL. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.