Insurance stocks can make a great addition to any investor’s stock portfolio. Not only does the insurance business have the potential to produce excellent long-term returns, but it’s also a business that works in good times and bad.
With that in mind, here’s an overview of how the insurance business works, some important concepts to know, and three insurance stocks that investors should keep on their radar in 2023 and beyond.
Three top insurance stocks for 2023
1. MetLife (NYSE:MET)
Investors who want exposure to insurance can consider MetLife as a fantastic alternative. It is the biggest life insurer in the United States and also has a sizable retirement solutions division. MetLife has a transparent business strategy and a track record of producing impressive returns on equity. Also, the company offers one of the highest dividend yields within its peer group, which has the potential to considerably increase overall gains over the long term.
During a market collapse in the first half of 2022, MetLife beat the S&P 500 by 20 percentage points, demonstrating that the life insurance industry is also comparatively recession-resistant.
2. Markel (NYSE:MKL)
Markel is a speciality insurance that chooses to cover uncommon risks, which is a crucial line of work during both strong and weak economic times. In addition to frequently operating at a nice underwriting profit, Markel also employs an intriguing investment approach.
Markel invests around one-third of its assets in publicly listed equities rather than just safe investments like high-grade bonds, and through its Markel Ventures division, it even acquires entire companies. Because of this, Markel is frequently compared to Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), which also happens to be Markel’s largest stock holding.
3. UnitedHealth (NYSE:UNH)
The best course of action is frequently to stick with market leaders, such as leading U.S. health insurer UnitedHealth, when seeking for stocks that are suitable for novice investors. With one of the strongest net margins in the sector, the company provides services to more than 75 million customers worldwide. The corporation also owns Optum, which offers technology, analytics, and other services to the healthcare and pharmaceutical industries in addition to its main UnitedHealthcare business.
Also, management at UnitedHealth has a history of being shareholder-friendly. Since 2010, it has boosted the dividend each year and spends enormous sums on share repurchases. By mid-2022, UnitedHealth has produced total returns for investors of 900%, more than tripling the output of the S&P 500 during the same 10-year period.
How insurance companies make money
When purchasing any stock, it’s crucial to comprehend how the company generates revenue. This seems straightforward, yet when it comes to the insurance sector, it’s frequently misinterpreted.
Selling insurance policies and collecting more money in premiums than they expend in claims is the obvious method that insurance companies can profit. A profit through underwriting is what this is. Yet, the majority of insurance companies do not prioritize an underwriting profit. In terms of underwriting, many of the biggest insurers are content to just break even or perform somewhat better.
Investing the money that insurance firms receive before paying out claims is the second, and more significant, way they make money. The float is the term for this money. The majority of insurers place their float in secure investments like top-notch bonds, but others decide to be a little more daring and purchase other kinds of investments.
This is undoubtedly a condensed explanation. Two of the companies featured in this article have significant non-insurance operations as well. Insurance companies have additional ways to make money. But this is the key principle that guides how the company operates.
Three important metrics for insurance investors to know
To analyze insurance stocks, most standard metrics work, such as return on equity (ROE) and net margin. However, there are three insurance-specific profitability metrics that you should know before getting started:
- Loss ratio: This is the percentage of an insurer’s premiums paid out as claims. For example, if an insurer collects $100 million in premiums and pays out $70 million for claims, the insurer has a loss ratio of 70%.
- Expense ratio: This is the percentage of premiums that an insurer spends to run its business. For example, expenses might include employee salaries and office equipment. An insurer with $100 million in collected premiums and $20 million in expenses would have a 20% expense ratio.
- Combined ratio: This is the combination of the loss ratio and the expense ratio. An insurer with $100 million in premiums and $90 million in losses and expenses would have a combined ratio of 90%. A combined ratio of less than 100% shows an underwriting profit and is a sign of good risk management.
Types of insurers
Like most industries, insurance companies can be divided into subcategories, so here’s a quick explanation of the main types of insurers and what they do:
- Property and casualty: Property and casualty (P&C) insurers write insurance policies that cover property damage and provide liability protection. Auto and homeowners insurance are two common forms. Renters insurance and pet insurance are two other common examples. P&C insurance is typically the easiest type to understand and analyze, especially for beginners.
- Life: Life insurance provides money to a designated beneficiary upon the death of the insured person.
- Health: As the name implies, health insurance helps cover healthcare expenses for the insured. Health insurance products vary dramatically in type and scope and have their own unique risks, particularly when it comes to regulatory issues.
- Specialty: Specialty insurance, also known as the excess and surplus (E&S) lines, includes anything that cannot be covered by a standard insurance company. This includes difficult-to-assess situations and can also include high-risk versions of the other types of insurance. For example, liability insurance for a demolition business could fall under the category of specialty insurance.
- Reinsurance: This is insurance for insurance companies. To protect themselves from catastrophic losses, insurers often purchase reinsurance policies that will cover losses above a certain amount. This can be extremely important in the event of natural disasters or mass-casualty events.