NEW YORK (TheStreet) -- With Berkshire Hathaway (BRK.A) holding its highly attended annual shareholders meeting this past weekend, we decided to check TheStreet Ratings to see what mid-cap insurance companies would be a good investments. After all, much of Berkshire's portfolio is concentrated in the sector, notably heavyweight GEICO.
Insurance companies derive the bulk of their revenues from premiums paid by members and most of their expenses from paid claims. In the life insurance sector, the claims come from deaths that more or less follow the actuarial tables with a great degree of accuracy. In the health insurance case, the expenses come from health benefits and cost of drugs. Cost of drugs is about 10% of medical benefits. Health insurance companies usually pay about 85% of their revenues for medical benefits and drug costs. The Affordable Care Act has added millions of new members paying premiums that increase the revenues of health insurance firms as well as revenues for hospitals as more people access the health care system.
So what are the best insurance companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which three insurance companies made the list. And when you're done be sure to read about which mid-cap oil companies to sell now. Year-to-date returns are based on May 1, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.PRI data by YCharts
3. Primerica, Inc. ( PRI)
Rating: Buy, A
Market Cap: $2.4 billion
Year-to-date return: -14%
Primerica, Inc., together with its subsidiaries, distributes financial products to middle income households in the United States and Canada. The company operates in three segments: Term Life Insurance; Investment and Savings Products; and Corporate and Other Distributed Products.
"We rate PRIMERICA INC (PRI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, increase in net income, notable return on equity and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 3.2%. Since the same quarter one year prior, revenues slightly increased by 8.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
- PRIMERICA INC has improved earnings per share by 27.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PRIMERICA INC increased its bottom line by earning $3.26 versus $2.77 in the prior year. This year, the market expects an improvement in earnings ($3.65 versus $3.26).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Insurance industry. The net income increased by 22.2% when compared to the same quarter one year prior, going from $37.19 million to $45.47 million.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Insurance industry and the overall market, PRIMERICA INC's return on equity exceeds that of both the industry average and the S&P 500.
- Net operating cash flow has slightly increased to $104.85 million or 7.71% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -5.26%.
- You can view the full analysis from the report here: PRI Ratings Report