Top Insurance Stocks for 2015

By Markets Fool.com

If you're looking for an investment that can create solid returns while protecting you from a market downturn, insurance stocks are a great option.

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Insurance will have its ups and down like any industry, but because it's a necessity, insurance has proved to be among the most durable sectors in the market. However, because of excessive risk-taking or poor underwriting, not every insurer is a winner. That's why it is essential for investors to focus on the best of the best.

Here are three of the top insurance stocks for 2015 and beyond.

Berkshire Hathaway
Warren Buffett is famed for coining the term "moat" to describe businesses with a lasting competitive advantage. Today, few companies inside or outside of the insurance sector have a wider moat than Berkshire Hathaway.

This advantage stems from the quality of Berkshire's insurance companies, led by auto insurer GEICO and reinsurers BH Reinsurance and General Re. By taking in more in customer premiums than it pays out in claims and expenses, Berkshire has enjoyed an underwriting profit for 11 consecutive years. That's a track record that few other insurers can boast.

It's through the consistency of Berkshire's insurance companies that Buffett has been able to acquire businesses such as energy giant MidAmerican, railroad operator BNSF, battery maker Duracell, and dozens of others, which have turned Berkshire Hathaway into the beast we know today.

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Markel
If you've ever worried about crashing your snowmobile, having your most prized piece of art stolen, or getting into an accident at your summer camp, then Markel can help. Markel is a leader in specialty insurance -- writing policies that don't quite fit into traditional lines.

Because of the uniqueness of these policies, correctly pricing the insurance can be extremely difficult. This is where Markel gains a huge leg up on the competition. Including the nine months reported in 2014, Markel has recorded an underwriting profit in five of the past six years.

But if strong underwriting wasn't enough, Markel, like Berkshire Hathaway, has been buying whole businesses. The 15 companies it's bought range from manufacturers of baking equipment to homebuilders and even concierge doctors.

Ultimately, the mixture of quality underwriting in difficult niche markets and the diversification created by owning whole businesses makes Markel a durable and compelling long-term buy.

ACE Ltd.
The degree to which a company underwrites profitably is measured using the combined ratio. The further the number is below 100%, the more profitable the company's insurance operations. Above 100%, the company is losing money. Markel's combined ratio, for instance, has been as low as 95% and as high as 102% between 2009 and today.

In the same time, ACE's combined ratio never rose above 95% and is currently sitting at 88%. While some of the difference can be attributed to ACE's writing more traditional property and casualty insurance, even among its direct peers ACE is simply the best.

It's my belief that ACE's strong underwriting results are one part disciplined management and one part a result of its vast global footprint. The company's presence in over 50 countries gives it the ability to find opportunity anywhere, and its scale gives it leverage as one of a handful of insurers able to manage complex and far-reaching claims for today's Fortune 1000 companies.

Who's the best?
Because of its size, diversified business model, and supreme financial strength -- including the $60 billion in cash equivalents it's currently holding -- few companies can match the consistency and durability of Berkshire Hathaway.

But Berkshire's massive size can also be a hurdle for growth. So for investors looking for greater growth potential, ACE is about 10 times smaller than Berkshire, yet it still has the scale and footprint that provide opportunities in the fastest-growing regions, such as Asia and Latin America. Moreover, the company has a fantastic CEO in Evan Greenberg, whose disciplined approach leads me to believe the company will grow responsibly and without taking excessive risk. For those reasons, ACE is my largest holding and my top insurer for 2015 beyond.

The article Top Insurance Stocks for 2015 originally appeared on Fool.com.

Dave Koppenheffer owns shares of ACE Limited and Berkshire Hathaway. The Motley Fool recommends and owns shares of Berkshire Hathaway and Markel. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.