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Investing in Stocks from the Insurance Sector

Insurance Stocks: A Valuable Addition to Your Investment Portfolio

Including insurance stocks in your investment portfolio can be a strategic move for long-term financial gains. The insurance sector not only has the potential to deliver robust returns over time, but it also operates reliably in both prosperous and challenging economic conditions.

To provide a comprehensive understanding, let’s delve into the workings of the insurance business, highlight key concepts, and spotlight three noteworthy insurance stocks worth considering in 2024 and beyond.

Top Three Insurance Stocks for 2024

1. MetLife (MET 0.66%)

MetLife stands out as a prime choice for investors seeking exposure to the insurance sector. As the largest U.S. life insurer, MetLife boasts a substantial retirement solutions business. Its straightforward business model, coupled with a history of robust returns on equity, positions it as an attractive option. Moreover, MetLife offers one of the highest dividend yields among its peers, enhancing total returns significantly over time. The company demonstrated resilience during market downturns, outperforming the S&P 500 by 20 percentage points in the first half of 2022.

2. Markel (MKL 1.12%)

Markel, a specialty insurer, specializes in covering unusual risks, making it a valuable asset in both thriving economies and recessions. Beyond generating consistent underwriting profits, Markel employs an intriguing investment strategy. Approximately one-third of its invested assets are allocated to publicly traded stocks, and it also acquires entire businesses through its Markel Ventures segment. Often likened to a smaller-scale version of Berkshire Hathaway, Markel’s largest stock investment, it offers investors a distinctive approach.

3. UnitedHealth (UNH -0.18%)

For investors favoring beginner-friendly stocks, UnitedHealth, a leading U.S. health insurer, is a prudent choice. With a global reach serving over 75 million people, UnitedHealth maintains one of the industry’s best net margins. In addition to its core UnitedHealthcare business, the company owns Optum, providing technology and analytics services to the healthcare and pharmaceutical sectors. UnitedHealth has a commendable track record of shareholder-friendly management, consistently increasing dividends since 2010 and actively engaging in share buybacks.

How Insurance Companies Generate Profits

Understanding how insurance companies generate profits is crucial before investing in their stocks. While selling insurance policies and maintaining an underwriting profit is one avenue, the primary source of profit for most insurers lies in investing the premiums they collect. Known as the “float,” this money is invested in safe instruments like high-quality bonds. Some insurers, like Markel, opt for a more diverse investment approach.

Key Metrics for Analyzing Insurance Stocks

When evaluating insurance stocks, common metrics such as return on equity (ROE) and net margin apply. However, specific profitability metrics unique to the insurance industry include:

  1. Loss Ratio: The percentage of premiums paid out as claims.
  2. Expense Ratio: The percentage of premiums spent on running the insurance business.
  3. Combined Ratio: The sum of the loss ratio and expense ratio. A ratio below 100% indicates an underwriting profit and sound risk management.

Types of Insurers

The insurance industry encompasses various subcategories, each serving distinct purposes:

  • Property and Casualty (P&C): Covers property damage and provides liability protection, including auto and homeowners insurance.
  • Life: Provides a payout to beneficiaries upon the insured person’s death.
  • Health: Covers healthcare expenses for the insured, varying widely in type and scope.
  • Specialty: Addresses unique and challenging risks, often considered excess and surplus lines.
  • Reinsurance: Offers insurance for insurance companies, safeguarding against catastrophic losses.

A Resilient Business with Strong Return Potential

Insurance companies exhibit attractive economics, with individuals entrusting them with funds until claims arise. The sector’s recession-resistant nature was evident in 2022, as the S&P Insurance index outperformed the S&P 500 by 13 percentage points. Amid economic challenges, insurance remains a necessity, ensuring sustained demand for coverage. Consequently, investing in insurance stocks can offer excellent long-term returns with relatively low volatility, making it an appealing choice for prudent investors.

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