Insurance Stocks: Best in 2023 & How to Invest in Them

Insurance Stocks
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Conservative investors have historically loved insurance stocks. These companies are resilient in any economic climate because they sell legally mandated or otherwise essential items that safeguard customers from catastrophic losses. Emerging insurtech (or “insurance technology”) stocks are bringing a more techno-centric approach to the business, from innovative mobile apps to automated underwriting methods, which may appeal to investors looking for higher potential returns (with associated risk). However, there is a great deal to learn about the insurance industry, from the many policies provided by insurance firms to the key performance indicators used to calculate financial success. In this piece, we’ll go over the best health and life insurance stocks.

What Is Insurance Stocks and How Does It Work?

Insurance stocks refer to shares of companies operating in the insurance industry that provide financial protection and risk management services to individuals, businesses, and other entities. These companies collect premiums from policyholders and, in return, offer coverage for various risks such as property damage, health issues, accidents, and other unforeseen events. Typically, insurance companies—which include reinsurance, health insurance, property and casualty insurance, and life insurance—issue insurance stocks.

Investing in insurance stocks can be appealing to investors seeking stable and consistent returns, as insurance companies generate revenue through recurring premium payments. Additionally, insurance companies often invest the premiums they collect in various assets, potentially generating additional income.

However, factors like regulatory changes, the state of the economy, and catastrophic events can have an impact on the insurance industry and, as a result, their stock prices. Investors interested in insurance stocks should conduct thorough research, considering factors like the company’s financial stability, underwriting practices, and competitive positioning before making investment decisions. Diversification is also crucial to mitigate the risks associated with investing in any specific sector, including insurance.

What Are the Different Types of Insurance Stocks?

The insurance market can be broken down into a few distinct subsets. Most people have a preference for one particular sort of insurance when shopping for coverage; therefore, you’ll notice a few more recognizable brand names within these groups.

The various insurance options are detailed below.

#1. Health Insurance Stocks

Health insurance stocks represent shares of companies operating in the health insurance sector. These companies provide coverage for medical expenses and services, offering financial protection to individuals and businesses against high healthcare costs. Health insurance stocks can be attractive to investors due to the consistent demand for healthcare services and the potential for growth as healthcare needs continue to rise globally.

Investing in health insurance stocks allows investors to participate in the healthcare industry’s growth and stability. Factors influencing health insurance stocks include healthcare policies, regulatory changes, advancements in medical technology, and the overall health of the economy. Companies in this sector often generate revenue through premiums, investment income, and underwriting profits. As with any investment, it’s crucial for investors to research individual health insurance companies, and assess their financial health, market presence, and competitive advantages before making investment decisions in this sector.

#2. Life Insurance Stocks

Life insurance stocks represent shares of companies operating in the life insurance industry. These companies offer a variety of life insurance products, such as term life, whole life, and universal life insurance, providing financial protection to individuals and families in the event of the policyholder’s death. Life insurance stocks are appealing to investors due to the industry’s long-term nature, recurring premium payments, and the potential for stable revenue streams.

Investing in life insurance stocks allows investors to participate in the financial protection needs of individuals, especially as people seek to secure their family’s financial future. Mortality rates, investment income, policy lapses, and regulatory changes are a few examples of the factors that affect life insurance companies’ profitability.

Investors interested in life insurance stocks should conduct thorough research on individual companies, considering their financial strength, underwriting practices, product offerings, and market presence. Diversification and a long-term investment perspective are essential for managing the risks associated with investing in life insurance stocks.

#3. Property and Casualty Insurance

These firms issue insurance with the intention of covering liability costs and repair or replacement costs for damaged property. Examples of this would be vehicle insurance and home insurance. One of the most popular insurance plans is this one.

In terms of total net premiums written, Berkshire Hathaway, Liberty Mutual, and Travelers Group are among the best property and casualty insurers in the world.

Why Should I Invest in Insurance Stocks?

Investing in insurance stocks can offer several benefits to investors:

#1. Stability

Insurance companies often have stable revenue streams from premium payments, providing a reliable source of income even in economic downturns. This stability can make insurance stocks a defensive investment choice.

#2. Dividend Income

Many insurance companies pay dividends to shareholders, providing a source of regular income for investors, especially those looking for steady cash flow.

#3. Portfolio Diversification

Including insurance stocks in your investment portfolio can enhance diversification, spreading the risk across different sectors. Diversification can help reduce the impact of poor performance in any single industry on your overall investment.

#4. Growth Potential

Insurance companies can experience growth as they expand their customer base, introduce new products, or enter emerging markets. Successful companies can translate this growth into increased stock prices, potentially leading to capital appreciation for investors.

#5. Hedging Against Risks

Insurance stocks can act as a hedge against certain risks. For example, if you own property and casualty insurance stocks, your investment might benefit if there are increased insurance claims due to natural disasters, as insurance companies often adjust premiums to compensate for higher risks.

#6. Inflation Hedge

Insurance companies often invest in a variety of assets, including real estate and bonds, which can act as a hedge against inflation over the long term

However, before putting money into an insurance company, it’s crucial to learn as much as possible about that firm. Consider variables such as the company’s financial health, management quality, competitive advantages, and overall economic situation before making any investment decisions. Further reducing risks and increasing the possibility of long-term returns can be achieved by diversifying assets across multiple industries and asset classes.

Risks to Investing in Insurance Stocks

The possibility of unanticipated catastrophic events—huge weather or other natural disasters that might significantly affect near-term profitability—is perhaps the most evident risk to insurance equities. To be clear, insurance businesses with any significant scale include the possibility of infrequent catastrophic events in their financial and underwriting models, and the best insurance stocks are designed to survive them. However, when they do occur (rather than if they do), they typically have only a little effect on the short-term share price performance of impacted insurance firms.

State insurance commissioners in the United States are responsible for much of the industry’s strict regulation. While it’s unlikely that any given insurance provider will run afoul of regulators’ policies, the possibility is nonetheless worth considering.

Finally, insurance stock investors should be aware of the threat that technological change poses in this more digital age. Currently, a small number of large incumbent businesses control the vast majority of the market share in each insurance subsector. But a number of younger, tech-savvy insurtech startups are developing attractive mobile-centric, AI-driven models that can write policies in minutes without agents and even pay claims in seconds. The current insurance system and its dominant players could be upended if alternative models continue to acquire traction and scale successfully.

How Insurance Companies Make Money

Before putting your money into a stock, knowing how the company generates revenue is crucial. Although intuitive, this is sometimes misunderstood in the context of insurance.

A simple way for insurance firms to turn a profit is to charge more in premiums than they pay out in claims. You’ve just made what’s called an underwriting profit. Yet, underwriting profit is not a priority for the vast majority of insurance providers. Most of the larger insurers are content with merely breaking even or showing minor gains from their underwriting operations.

The second and more crucial way insurance firms make money is by investing premiums and other payments they receive before handing them out to claimants. The float is the term used to describe this sum. Some insurance companies want to take a chance and invest their float in riskier assets, such as lower-rated bonds, whereas the majority of companies play it safe.

Obviously, this is a simplified explanation. Two of the companies covered in this article, for example, have sizable non-insurance operations in addition to their insurance business. This, however, is the fundamental concept upon which the enterprise rests. Also, read HOW MUCH DO INSURANCE AGENTS MAKE: 2023 Salaries Updated!

How Can You Buy and Invest in Insurance Stocks?

To buy insurance stocks, you can follow these steps:

  • Create a Stock Trading Account: You should open an account with a trustworthy brokerage provider. This can often be done online. Check with your broker to be sure you may buy and sell shares of the insurance company on that exchange.
  • Deposit Funds: Fund your stock trading account. You’ll use this money to buy shares of insurance companies.
  • Inquire about Different Insurance Agencies: Find out as much as you can about the various insurance providers. Think about things like financial security, track record, quality of management, and market tendencies.
  • Place an Order: You can place an order to buy insurance shares through your brokerage account after you’ve made your selection. You have the option of placing a limit order to buy the stock at a certain price or lower, or a market order to buy it at the current market price.
  • Track Your Spending and Savings: Always be aware of the status of your portfolio and read up on the insurance sector and the companies you’ve invested in. Stock prices can change for a number of reasons, so it pays to keep tabs on the market.
  • Consider Diversification: Don’t put all of your eggs in the basket of one insurance company’s stock. Spread the risk by investing in a variety of firms and markets.

In addition, always consider your long-term financial goals, your level of comfort with risk, and your research before making investing decisions. If you’re unsure, consider seeing a financial adviser for personalized guidance.

Best Insurance Stocks

Let’s have a look at some of the best insurance stocks for this year now that you know more about the various types of insurance stocks and how they produce money. Although it is impossible to know everything in advance, careful study, analysis, and risk management can increase the likelihood of a positive outcome. 

There are a variety of routes one may take to identify the best insurance stocks. Different investors will use both fundamental and technical analysis. Putting them together can yield impressive results.

Short-term traders may also choose to concentrate on insurance stocks with strong momentum and a focus on growth. Value-based insurance stocks tend to be good long-term investments, so some traders may want to concentrate on them.

The options provided here provide a diverse foundation from which to build.

#1. Root Insurance Stocks

Root Insurance is a technology-driven insurance company that uses data and telematics to offer personalized car insurance policies. Also, Root Insurance stocks represent shares in this company. It stands out for its innovative approach to insurance, using smartphone apps and data analytics to assess driver behavior and determine insurance premiums. By focusing on individual driving habits, Root aims to provide fair and customized insurance rates, attracting customers seeking personalized coverage.

Investing in Root Insurance stocks allows investors to participate in the growth of this disruptive insurtech company. Root’s business model appeals to tech-savvy consumers, making it a significant player in the evolving insurance industry. As with any investment, it’s essential for investors to research Root Insurance thoroughly, considering factors such as its technological innovations, market positioning, financial performance, and competitive landscape, before making investment decisions in this stock. Keep in mind that investing in individual stocks carries risks, so diversification and careful consideration of your investment goals are important.

#2. Nationwide Insurance Stocks

Nationwide insurance stock refers to shares of Nationwide Mutual Insurance Company, a major insurance and financial services company based in the United States. Also, Nationwide offers a diverse range of insurance products, including auto, home, life, and commercial insurance, along with retirement planning and investment services. The company is known for its extensive network of agents and customer-focused approach, providing coverage to individuals, families, and businesses.

Investing in Nationwide Insurance stock means purchasing ownership in the company. Shareholders may benefit from potential capital appreciation if the company’s stock price increases over time. Additionally, investors might receive dividends, which are regular payments from the company’s profits to its shareholders. Market conditions, insurance industry trends, and the company’s financial results are just a few of the variables that affect Nationwide’s stock performance. Investors interested in Nationwide Insurance stock should conduct thorough research and consider their investment goals and risk tolerance before making any investment decisions.

#3. Markel 

Markel is a niche insurer that focuses on insuring high-stakes, peculiar risks, and its services are in high demand regardless of the state of the economy. It has a unique investing strategy on top of its consistent underwriting profit.

About a third of Markel’s invested assets are in publicly listed companies, and the company also buys entire firms through its Markel Ventures division, rather than relying only on safe investments like high-grade bonds. This is because Markel’s largest stock investment is in Berkshire Hathaway (BRK.A. 0.66%) (BRK.B. 0.8%), prompting comparisons between the two companies.

#4. UnitedHealth

A good rule of thumb for novice investors is to stick with market giants, such as UnitedHealth, the largest health insurer in the United States. The firm has one of the highest net margins in its field while still serving over 75 million customers around the world. In addition to its primary business, UnitedHealthcare also owns Optum, which offers technology, analytics, and other services to the pharmaceutical and healthcare sectors.

UnitedHealth also has a solid record of shareholder-friendly management. It has spent billions on share buybacks and boosted its dividend each year since 2010. UnitedHealth has provided investors with total returns of 900% over the past decade to mid-2022, which is more than three times the performance of the S&P 500 over the same time period.

#5. Prudential PLC (PRU)

Prudential is an international insurance corporation with its headquarters in London, England. It was established in 1848, and by 2020, it had raked in more than $55 billion in sales. Prudential’s shares are listed on the New York Stock Exchange, the London Stock Exchange, and the Hong Kong Stock Exchange.

There has been a re-rating of several European insurers since the return to normalcy of dividend payments following the coronavirus outbreak. Deutsche Bank is just one of many major investment institutions that think the industry’s recovery still has a ways to go.

Due to the fact that Prudential’s core market is now Asia, but it also services customers in the United Kingdom and retirees in the United States, the company is an intriguing focal point for investors. More potential clients may consider Prudential if optimistic predictions for the Asian economy pan out.

Since 2018, the share price has been steadily declining, reaching multi-year lows in 2020. Despite the fact that the stock price has recovered from its recent lows, it ended 2022 at a lower level. 

Do Insurance Stocks Do Well in a Recession?

Yes, the performance of insurance stocks during a recession can be mixed and depends on various factors. Insurance companies typically generate revenue from premiums, which can provide a stable income stream even in economic downturns. Additionally, insurance stocks might benefit from increased demand for certain types of insurance, such as health and unemployment insurance, during recessions.

However, insurance companies also invest a significant portion of their funds in financial markets. During a recession, investment returns may decline due to market volatility, impacting the profitability of insurance companies. Moreover, if a recession leads to a widespread economic downturn, it can result in higher insurance claims, affecting underwriting profitability.

In conclusion, despite the fact that insurance stocks may provide some stability due to recurring premium income, a complex interplay of factors can affect their performance during a recession. Diversification and careful consideration of economic indicators are essential for investors looking to navigate the impact of recessions on insurance stocks.

Can You Make Money Investing in Insurance Stocks?

Yes, it is possible to make money investing in insurance stocks. Like any other sector, investing in insurance stocks carries both opportunities and risks. Insurance companies can be profitable, offering investors the potential for capital appreciation as stock prices increase over time. Additionally, many insurance companies pay dividends to shareholders, providing a source of income.

Investors can make money by investing in insurance stocks if the companies they choose perform well. Factors such as the company’s financial stability, management quality, market positioning, and industry trends can influence stock prices. Diversification, thorough research, and a long-term investment approach are essential strategies to mitigate risks and increase the potential for returns when investing in insurance stocks.

However, it’s important to note that all investments come with risks, and there are no guarantees of profits. Investors should carefully assess their risk tolerance, conduct thorough research, and consider consulting a financial advisor before making investment decisions in insurance stocks or any other financial instruments.

Alternatives to Investing in Insurance Stocks

Despite the abundance of single-industry insurance stocks, financial holding corporations can provide diversification and potentially higher returns. Of these, Berkshire Hathaway (BRK.A.) is the most well-known. Financial holding companies, like insurance stocks, are part of the broader financial sector but have multiple lines of business, such as insurance subsidiaries as well as wholly owned and acquired non-insurance businesses, to help spread out the effects of poor performance in any one area.

Similarly, bank stocks are an interesting alternative to insurance companies within the financial sector, despite being more cyclical and hence performing better when the economy is doing well.

Is Insurance a Good Stock Investment?: Bottom Line

Investing in insurance stocks can be a good option for certain investors. Insurance companies often provide stable earnings, recurring revenue from premiums, and potential dividend payments. During stable economic periods, insurance stocks can offer reliability and modest growth potential. However, the industry is subject to the effects of economic cycles, interest rates, and regulatory changes, which can affect stock performance. Investors interested in insurance stocks should carefully assess individual companies, considering their financial health, market position, and management quality. 

Diversification is key to managing risks; spreading investments across different sectors can help balance a portfolio. As with any investment, it’s important to research thoroughly, consider your risk tolerance, and consult a financial advisor if needed.

Frequently Asked Questions

Why not to invest in insurance?

Insurance premiums are not tax-deductible and produce no return or profit. The premium is paid to the insurance company in order to shift the risk away from the policyholder. To rephrase, insurance premiums are not investments but rather a means of mitigating risk.

Why are healthcare stocks doing poorly?

The stock of health insurers fell after UnitedHealth Group forecast greater medical costs as elderly Americans resume elective procedures they put off during the COVID-19 pandemic. Shares of healthcare providers UnitedHealth, Humana, Elevate, and CVS Health all fell.

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