You Should Add This Insurer to Your Portfolio

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Insurance companies were among the hardest hit during the global recession, but many are now posting major profits. Before getting too excited, however, many of these firms still suffer from fundamental setbacks. That's why it is important to take a look at the books and trends; this lets you see which of these companies are likely winners in the the years ahead and which could be losers.

Progressive is improving returns

Progressive (NYSE: PGR) will be better able to offer some of the lowest insurance rates due to its continual drive to streamline operations while decreasing operating expenses. The firm is a leader in offering online policy quotes, significantly cutting down customer service expenses while increasing the revenue stream. This business strategy has helped improve the company's return on equity significantly in the last year, and this means improved operating potential in the years ahead.

<img alt="" src="http://media.ycharts.com/charts/ec33d4c4c6606a42272bfd72a6f4c470.png" />

PGR Return on Equity data by YCharts

The company is continually finding savings for those that it insures by offering discounts for safe drivers. This will keep those drivers with the company, and because of their driving savvy they aren't likely to require hefty payouts from Progressive. That will save the company money, allowing it to further reduce its rates while attracting more customers. 

Assured will suffer from increasing competition

Assured Guaranty (NYSE: AGO) didn't issue many of the dangerous bonds that were connected to the housing boom. For this reason, the company wasn't severely downgraded like many of its peers. This will allow the company to focus on insuring municipal bonds, which are a major revenue source. Municipal bonds are paid right away, meaning that the company will have extra cash flow for future investments. 

The company is at risk of increased competition, however. The firm has been a major bond insurer for the last several years, but newbies such as White Mountains Insurance Group are placing potential strains on business. For this reason, the company's competitive advantage will likely begin to wane next year.

Analysts agree. The firm is still pegged to earn 16% more per share this year, but will likely fall 15% next year. Revenue is expected to decrease by 2.2% this year before dropping 17.8% next year.

Ace's advantage is its wide selection of policies

Ace (NYSE: ACE) is a unique company because it offers a multitude of insurance policies. Most firms focus on one or a few types of insurance, and this gives Ace an economic advantage. The company's ability to increase its offerings will allow it to cross-market its various insurance policies to the same company. This will allow it to cash in on a single customer multiple times. 

While the risky insurance that the company has offered in the past left it exposed to much of the economic recession's worst, leaving the recession behind could mean a sharper turnaround for this firm. The company is still involved in annuity reinsurance, however; that type of exposure could make the company vulnerable to a major decline should the economy take a turn for the worse.

Analysts are wary about the company. While revenue increases are expected for the next two years (4.7% this year and 5.2% next year), earnings per share are expected to fall by 2% next year after rising 15% this year. This could be a result of the corporations' solid bargaining power when negotiating insurance rates. 

Making sense of it all

Progressive is my pick of the litter because of its growing ability to attract new customers through reduced rates. The increased competition at Assured doesn't sit well with me, and it is best to avoid the company's stock because of its decreasing competitive advantage. Ace is a great stock to own during economic booms, but the potential of a bust for the risk-exposed company concerns me too much to pick up any shares.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

 


Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Progressive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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