To achieve a diversified portfolio and protect yourself in the case of a market crash, you must spread your investments around. A typical diversified portfolio includes a mixture of fixed income, stocks, bonds, ETFs, and mutual funds. Speaking of which, the stock market is one of the biggest wealth creators in history. Insurance stocks don’t double their value overnight, but they generate long-term returns, so there’s good enough reason to include them in your portfolio. Being able to recognize when the economics of the insurance industry suffer dramatic change is essential because it helps you make the right buy or sell decisions. In spite of the fact that the industry is constantly changing, you can still make a profit.
A quick look into the main types of insurers
If you’re willing to put in time and effort to learn the basics of insurance, you can leverage several opportunities. The insurance field is broad. There are about 130 publicly-traded insurance companies in the United States and, needless to say, they’re worth billions of dollars. Insurance company portfolios feature fixed-income securities and high-quality bonds, issued by the government. Let’s not forget about the triple-A bonds from large corporations. There are several types of insurers, such as property and casualty, life, health, and specialty. In this article, we’ll focus our attention on property and casualty insurers.
Property insurance helps protect stuff that you own, such as your home or car. In case you were wondering how much does car insurance cost per month, know that the cost for minimum coverage depends based on age, location, and several other factors. Casualty insurance, on the other hand, provides liability coverage in case you were involved in an accident that caused injury to another person or damage to their belongings. The claims for losses can be made during the policy period or shortly after. It’s not difficult to analyze property and casualty insurers because they underwrite short-tail insurance lines.
Profitability metrics to consider when investing in insurance stocks
It doesn’t matter if you’re looking for growth or value, you must think like an analyst. When analyzing insurance stocks, take into consideration the following profitability metrics:
Loss ratio – it’s calculated by dividing the total incurred losses by the total collected insurance premiums.
Expense ratio – it measures how much of a fund’s assets are used for operating expenses.
Combined ratio – it’s the combination of the loss ratio and the expense ratio; it measures the profitability and financial health of a company.
What needs to be understood is that insurance is a commodity business and companies don’t have much pricing power. Only the top insurance companies will generate profit for investors. Also, it’s important to note that insurance companies tend to pay dividends rather than generous payouts. Get a good understanding of the business you’re investing in and diversify with different types of insurers. Besides property and casualty insurers, take into account disability insurers. The great thing about having variety is that you can minimize your losses.