The Other Way To View Insurance

Clients and investors at large often think of insurance as a necessary evil and one that drains their bank accounts every month. Still, there’s no getting around the fact that auto, health and home insurance are must-haves.

Likewise, life insurance, though optional, is an increasingly prominent part of the advisor toolbox and a frequent point of interest for clients. Of course, as is the case with other forms of insurance, life insurance results in another monthly obligation, but it can payoff in the long run. Something to consider: Many clients overlook the potential potency and attractive income properties of insurance stocks.

For those that aren’t familiar with insurance equities or have reservations about the asset class, which is easy to understand at a time when the financial services sector is struggling, remember the following about insurance investing: It’s one of the foundations of Warren Buffett’s Berkshire Hathaway. Including GEICO Auto Insurance, Berkshire Hathaway controls a slew of insurance interests.

Insurance investing has merit. After all, the S&P Insurance Select Industry Index is higher this year while the S&P Financial Services Select Index is in the red. Over the past three years, the gap is 1,440 basis points in favor of the insurance benchmark.

Insurance Stocks Could Be Pleasant Surprises

In recent months, weakness in the commercial real estate (CRE) market and an unusually large number of auto insurance claims, investors became skittish regarding insurance equities. Valid concerns to be sure, but they may be overblown.

“However, we think concerns about the industry’s CRE exposure are overdone. First, US insurance companies’ CRE portfolios are well diversified with limited exposure to the most problematic CRE assets — the office sector, which accounts for just 1.95% of the industry’s total cash and invested assets,” notes Anqi Dong of State Street. “And insurance companies’ CRE loans are usually high quality with low loan-to-value ratios, which historically has resulted in the lowest default and loss rates in the CRE finance industry.”

Another factor that shouldn’t be ignored is that while insurance stocks reside in the financial services – one of the bastions of the value factor – many carriers are poised to deliver surprisingly strong earnings per share over the next couple of years.

“Due to stable demand and a strong pricing environment, property & casualty (P&C) insurers’ net written premium — a key indicator of earned premium for the following year — is expected to increase by high single digits for 2023 and 2024, above the industry’s long-term average,” adds Dong.

Buoyant Outlook for Insurance Stocks

As an industry, insurance isn’t “sexy” and it lacks the glitz of numerous other segments that clients are attracted to. However, insurance equities have tailwinds.

Those include pricing power – an enviable characteristic with inflation still high – and an increasingly favorable operating environment.

“With new higher premiums taking effect, easing inflation, and improved investment returns driven by higher rates, P&C insurance companies’ return on equity is projected to improve to 7.8% in 2023 from 3.4% last year and strengthen to 9.3% in 2024,” concludes State Street’s Dong.  “Given the constructive operating environment, the industry’s 2023 earnings estimates are near year-to-date highs. And next year’s earnings estimates were upgraded by 4.8% over the summer, compared to little changes for the broad market.”

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