In this guide, we'll discuss the basics of investing in insurance companies, including the types of companies you can invest in, the risks and rewards and the steps to get started. We'll also provide tips on evaluating insurance companies and determining which ones offer the best returns. Read on to learn how to start investing in insurance companies.
Overview of Insurance Companies
Investing in insurance companies can be a fantastic way to diversify your portfolio, but you must understand the risks and rewards. Investors often consider insurance companies safe investments, as they tend to be well-regulated by governments and are required to maintain certain levels of liquidity, meaning they must have enough cash on hand to cover obligations to their policyholders.
Investing in different insurance companies can provide you with a steady income stream via dividends, with the potential for long-term capital appreciation. However, the fact that insurance companies are heavily regulated can make them more difficult to invest in than stocks and bonds.
Life Insurance Companies
Life insurance companies provide policies that pay out a lump sum or ongoing payments in the event of death. Investing in them can be lucrative, as they typically have low expenses and good dividend yields. Some publicly-traded life insurance companies include Prudential plc (NYSE: PUK), MetLife Inc. (NYSE: MET), Allianz SE (FRA: ALV) and AXA SA (OTCMKTS: AXAHY). You can invest in insurance companies through mutual funds, in which you pool your money with other investors and agree to let a professional fund manager choose your investments. Or you can directly buy bonds or financial stocks to add to your portfolio.
Either way, take note of the regulations governing these companies, which can vary depending on your jurisdiction. By researching and understanding the risks and rewards, you can benefit from steady dividends and long-term capital appreciation.
Property and Casualty Companies
Property and casualty companies sell insurance policies to cover losses from property damage or bodily injury. Examples of publicly-traded companies that offer this type of coverage include Chubb Limited (NYSE: CB) and Progressive Corp. (NYSE: PGR). These companies are typically well-regulated and offer the potential for steady income via dividends or long-term capital appreciation.
However, investing in them requires a certain level of risk tolerance as the stock price can be volatile due to unpredictable events. Get familiar with the regulations governing these companies to ensure your investment is sound.
Specialty Companies
Specialty companies offer more specialized coverage than your traditional property and casualty insurers. Examples of publicly-traded specialty insurance companies include American International Group, Inc. (NYSE: AIG) and The Hartford Financial Services Group (NYSE: HIG). Their services could include particular risks such as pet insurance, cyber-risks or marine and aviation policies. These types of policies can be expensive due to their high costs.
They might include benefits like legal assistance and travel insurance that aren't available from traditional insurers. The stock price of these companies can be volatile. Make sure to research all regulations before investing any money.
Health Insurance Companies
Health insurance companies provide policies that pay for medical expenses incurred by the policyholders. They generally cover the cost of doctor visits, hospital stays, medications and other medical services. Some publicly-traded health insurance companies include UnitedHealth Group Incorporated (NYSE: UNH), Aetna Inc. (NYSE: AET), Elevance Health Inc. (NYSE: ANTM) and Cigna.
Investments in these companies can be lucrative, as they typically have high dividends and potential for long-term growth. But understand the risks involved. Stock prices can be volatile due to changing regulations and market conditions and can be illiquid, meaning they are not easily convertible to cash.
Reinsurance
Reinsurance protects insurance companies from losses on policies they've issued. It's a form of risk management in which an insurer shares its risk with another insurer or a group of insurers. Doing so allows them to manage their exposure to oversized and/or unexpected claims, spread their risk more effectively and regulate the premiums they collect. Examples of publicly-traded reinsurance companies include Hannover Rück SE (FRA: HNR1), Everest Re Group Ltd. (NYSE: RE) and PartnerRe Ltd. (NYSE: PRE.PH).
Mutual Insurance Companies
Policyholders own mutual insurance companies, which are also their customers. Rather than shareholders receiving dividends, the profits from the company get shared among the policyholders in the form of lower premiums. Examples of mutual insurance companies include State Farm, Mutual of Omaha and Farmers Insurance Group.
How Insurance Companies Make Money
Insurance companies make money through premiums they collect from their customers, the amount that policyholders pay in exchange for protection against specific risks.
These premiums cover claims and administrative expenses. That money can also be invested to create more revenue. Companies may also charge additional fees for certain services, such as medical exams or reports. Besides direct income from premiums, insurance companies can also make money through investments, reinsurance arrangements and other opportunities.
They invest the premiums collected from their customers in different financial products, such as stocks, bonds and real estate, to generate additional income. Additionally, insurers may enter into agreements with each other or with third-party reinsurers to help reduce their risk exposure. Some companies may sell travel insurance or roadside assistance.
How to Invest in Insurance
Investing in insurance companies can be a lucrative way to diversify your portfolio and create long-term wealth. There are several ways to invest in the insurance industry, such as through publicly traded stocks and mutual funds. You can also purchase bonds and invest in special purpose vehicles (SPVs) the company offers.
Step 1: Research insurance companies.
Research and understand the different types of insurance companies available using the MarketBeat stock market sector overview. Before investing, look up stocks on MarketBeat and compare companies in size, financial strength, investment portfolio and profitability.
Compare the performance of their stock over time to other companies in their sector using the comparison tools (below, where we've compared Prudential to several of its industry competitors).
You can also find a company's ratings and reviews online and information about its products and services. For instance, independent credit rating company AM Best gives each insurance company credit ratings and financial strength ratings, which are available on its website by searching for the company (for example, Prudential).
Consider the specific products or services each insurer offers when deciding which one to invest in. For example, Prudential's website provides information about its different life insurance policies.
Step 2: Understand ratios.
When understanding how to invest in insurance companies, try to understand the various ratios used to evaluate their performance. Ratios compare a company's performance against its peers and industry averages.
- Loss ratio: The loss ratio measures the amount of claims an insurance company pays out compared to the premiums it collects. You can calculate it by dividing the total amount paid out in claims by the total premiums collected. The lower this ratio, the more profitable the company will likely be.
- Expense ratio: The expense ratio measures how much an insurance company spends on operating expenses, such as salaries and commissions, as a percentage of its total income. The higher this ratio, the less efficient the company will likely be.
- Combined ratio: The combined ratio measures an insurer's combined costs of insuring and operating its business. Add together its loss and expense ratios to help you estimate whether or not the company will make a profit or loss in any given year. A combined ratio of below 100% indicates that a company will profit; anything above 100% will make a loss.
For example, say we chose to research Progressive. If we click on "financials" under Progressive and view its annual report, we can calculate these ratios using the report's information, then compare them to its competitors.
Step 3: Choose an investment option.
Once you've researched and decided which company to invest in, the next step is choosing an investment option that fits your goals and risk tolerance.
Investing in individual stocks, such as the best financial services stocks on MarketBeat, can provide more control over your investments but requires more time for research and monitoring market movements. Mutual funds offer greater diversification and are less risky than individual stocks, but fees may be higher than other types of investments.
Bonds are generally considered low-risk investments but offer lower returns than other options. Special purpose vehicles, where multiple investors pool their capital and invest in a single company, offer access to high-yield investments with potential for significant returns. Still, there are numerous risks involved as well.
Step 4: Consider taxes.
Taxes on insurance investments vary depending on the type of investment made and the country or state where you reside. Before investing, consider any tax implications that may apply based on your location and type of investment.
Step 5: Start investing.
Once you have researched, chosen an appropriate investment option, considered taxes and determined how much money you have available for investing, it's time to make your purchase. There are many ways to buy the top-rated finance stocks on MarketBeat, including online brokers. You can purchase mutual funds from various providers, and bonds can be bought through banks.
Pros and Cons of Investing in Insurance
Although investing in insurance can be a lucrative way to earn long-term growth and income, it has advantages and disadvantages like any investment. Here are some pros and cons to this type of investment:
Pros
Here are some of the pros investing in insurance can offer:
- Diversification: Diversifying your investments means spreading out your risks across different types of assets, which can reduce potential losses. Insurance companies offer a range of products that cater to different risks, such as life, health, property and casualty insurance, allowing you to spread your risk across different types of assets and potentially reduce exposure to one market.
- Potential for returns: Insurance can offer higher returns than other types of investments, depending on your chosen company. Many insurance companies offer long-term investment opportunities that can provide a steady stream of income and capital appreciation.
- Safety: Insurance investments are usually low-risk and safer than other investments. Insurance companies must maintain certain capitalization levels and adhere to strict investment guidelines to reduce the likelihood of facing financial difficulties. They must also maintain a certain level of liquidity, meaning they must have sufficient funds to meet their obligations to policyholders, even during economic uncertainty.
Cons
The following are some major cons of investing in insurance:
- Volatility risk: The market value of insurance investments can fluctuate, and some companies specialize in insurance types that carry additional risk. So even though the risk may be lower, there's still a chance of losing money.
- Illiquidity risk: Some investments may not be easily sold or exchanged for cash, and you could be locked in for longer periods without access to your money. You may have limited control over your investments as the insurance company sets policies and products.
- Costs: Insurance investments can have an up-front cost, including brokerage fees and other costs. These can erode any potential gains made from the investment itself.
- Research required: Investing in insurance requires research. Products vary widely and have different rules and regulations, which you need to understand before committing.
Rewards of an Industry Concerned with Risk
Investing in insurance companies can be a sound strategy to diversify your portfolio if you conduct research and seek professional advice first. Read up on the risks and rewards and the complex regulatory landscape governing the industry. That way, you can make informed decisions and benefit from steady income and long-term appreciation of insurance as an investment.
FAQs
If you're considering investing in insurance companies, you may have questions about the process of how to invest in insurance and what to expect. In this section, we'll address some frequently asked questions about insurance investing and provide insights to help you make informed decisions.
How do you make money by investing in insurance?
You can make money by investing in insurance companies by choosing publicly traded insurance company stock or by choosing mutual funds that invest in these companies. They can help you hedge against risk by diversifying your portfolio and creating long-term growth while potentially earning dividends that provide income while your investment grows.
What does it mean to invest in insurance?
Investing in insurance companies is a way to diversify your portfolio, but you must understand the risks and rewards. These companies are generally safe investments due to regulations and required liquidity, offering steady income and potential long-term appreciation. However, regulations make investing in insurance companies more complex than other assets. They must have enough capital to cover liabilities and adhere to government regulations.
What type of insurance is a good investment?
There's no one-size-fits-all answer for how to invest in insurance company. Different types of insurance may be better investments for you, depending on your risk tolerance, investment goals and market conditions. However, some types of insurance, such as property and casualty insurance, have historically been more stable and reliable due to their consistent demand and low correlation to other asset classes. Conduct thorough research and seek professional advice before making any investment decisions.
