Insurance is something that you shouldn't go without, obviously! It's also something I think should be included in every Portfolio. Here are some of my factors of understanding when it comes to performing analysis on Insurance Stocks and some that I perceive as a great Investment.
Combined Ratio: This is a key metric that insurance companies use to measure profitability. It’s calculated by dividing the sum of incurred losses and expenses by earned premiums. A ratio below 100% indicates that the company is making an underwriting profit, while a ratio above 100% means it's paying out more in claims and expenses than it's earning in premiums.
Premium Growth: Look for companies that show consistent premium growth. Growing premiums suggest that the company is expanding its market share or offering competitive products that attract customers.
Investment Portfolio: Insurance companies generate income not just from premiums but also from investing those premiums in various asset classes. A well-managed investment portfolio can significantly impact profitability. Review how much of their revenue comes from investment activities, and assess the quality and diversification of their investment assets.
Reserves and Solvency Ratios: An insurance company’s reserves are the money set aside to pay future claims. Strong reserves indicate financial health. Solvency ratios measure the company’s ability to meet its long-term debt and financial obligations. A higher ratio suggests better financial stability.
Dividend History: Many insurance companies pay dividends to shareholders, but not all do so consistently. Focus on companies that have a strong history of paying and increasing dividends over time. Stable dividends often indicate a company that is financially sound and committed to returning value to shareholders.
Interest Rate Sensitivity: Insurance companies, especially life insurers, are highly sensitive to interest rate changes because a significant portion of their earnings comes from fixed-income investments. Companies that manage this sensitivity well may offer better long-term stability.
Regulatory Environment: Insurance is a heavily regulated industry. Keep an eye on the regulatory changes that may affect the company’s operations and profitability. Stable companies often have a history of navigating regulatory changes effectively.
My Favorite Insurance Companies
Berkshire Hathaway (BRK.B): Although not a traditional dividend-paying stock (Berkshire famously reinvests its profits), it’s one of the largest and most stable insurance companies in the world. Through its GEICO subsidiary, Berkshire Hathaway has a significant foothold in the auto insurance industry. What sets it apart is its massive investment portfolio and diversified business interests, making it a strong long-term investment.
Chubb (CB): Chubb is one of the world’s largest publicly traded property and casualty insurance companies. It has a strong history of paying dividends and is known for its financial strength, as reflected by a low combined ratio. Chubb has steadily increased its dividend, making it attractive for income investors.
MetLife (MET): MetLife is a global leader in life insurance, employee benefits, and pension plans. It offers a solid dividend yield, and while it is more sensitive to interest rate fluctuations, it has shown resilience in different market conditions. MetLife has a track record of stable dividend payments, appealing to investors looking for income.
Travelers Companies (TRV): A Dow Jones Industrial Average component, Travelers is a leader in property and casualty insurance. Its combined ratio and prudent underwriting practices have allowed the company to consistently generate profits. It has a history of increasing dividends, making it a strong candidate for income-focused investors.
Prudential Financial (PRU): Prudential is a major player in life insurance, retirement planning, and investment management. The company is known for its strong financial position and attractive dividend yield, appealing to those looking for income as well as capital stability.
Aflac (AFL): Aflac is well known for its supplemental insurance products, particularly in the health and disability insurance markets. The company has paid dividends for several decades, increasing them annually, making it a great choice for dividend growth investors.
Conclusion
When analyzing insurance companies, weigh the combined ratio, premium growth, investment portfolio performance, and solvency ratios heavily. These metrics give you insight into both their operational profitability and financial health. In terms of investments, companies like Chubb, MetLife, and Travelers offer stability and attractive dividends. If you’re looking for diversification through a company like Berkshire Hathaway or supplemental income options like Aflac, these companies provide long-term growth opportunities with different risk profiles.
Disclaimer: I’m not a licensed financial adviser. These are simply my personal insights and observations. Always perform your own research or consult with a financial professional before making any investment decisions.
