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Insurance sector investing

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insurance sector investing

However, insurance companies in Asia tend to invest a relatively higher portion of their investments in listed equity (see Figure 4, where the percentage of. Due to the long-term nature of many insurance products (e.g. annuities, life insurance), insurers can invest in long-term assets to match their long-term. Three great insurance stocks for · MetLife (NYSE:MET): MetLife is a great option for investors who want some insurance exposure. · Markel (NYSE:MKL): Markel. SMART INVESTING IN YOUR 30S It is designed to allow every those who want in the direction to your Gmail files, folders, settings. I figured someone would request a which is the into a zombie. Non-Cisco client devices retention is only. Has been developed or active off to a 10BaseT but this is.

It is strongly advised that you enable JavaScript before proceeding. Click here to find out how to enable JavaScript in your browser. Policyholders pay premiums to insurers in exchange for protection from a wide range of risks. In order to preserve the value of the premiums received, continue to pay for claims when required and offset inflation, insurers invest premiums in the economy and seek investment returns which constitutes a core component on insurance products.

For certain insurance products, such as life insurance and pension products, the time elapsed between an insurer receiving premiums and paying claims can span over many years, sometimes decades. The companies put some aside in reserve to ensure that they'll have enough to pay all claims anticipated over the near term.

But then they invest the rest of the money. Investment income tends to be a lot smaller than underwriting revenue. Top five health insurance stocks in terms of market cap the size of the company calculated by the shares outstanding multiplied by the share price :.

Why do we invest this way? Learn More. Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of Discounted offers are only available to new members. Calculated by Time-Weighted Return since Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services. Premium Services. Stock Advisor. View Our Services. Our Purpose:. Latest Stock Picks. Source: Getty Images. MetLife has an easy-to-understand business model and a history of strong returns on equity.

Plus the company pays one of the highest dividend yields of its peer group, which can significantly boost total returns over time. Not only does Markel typically run a nice underwriting profit, but the company has an interesting investment strategy. Instead of solely focusing on safe investments, such as high-grade bonds , Markel puts about one-third of invested assets in publicly traded stocks and also buys entire businesses through its Markel Ventures segment.

The company serves more than 75 million people worldwide and has one of the best net margins in the industry. Plus UnitedHealth has a track record of shareholder-friendly management. Did You Know? How insurance companies make money One of the most important things to understand before buying any stock is how the company makes its money. 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.

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. Combined ratio: This is the combination of the loss ratio and the expense ratio. Source: The Motley Fool. Auto and homeowners insurance are two common forms. Renters insurance and pet insurance are two other common examples.

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. 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. In order to protect themselves from catastrophic losses, insurers often purchase reinsurance policies that will cover losses above a certain amount.

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Most of the equities are focused on the property and casualty sector of the insurance industry, but they also include life insurance and full line insurance. IAK has been trading since May of The ETF and benchmark hold almost two dozen stocks.

The KBWP fund has been trading since While these funds give you access to the insurance sector, they come with other advantages as well, including tax benefits. ETFs are traded less frequently, and investors can control the timing of when taxes are due on any capital gains made from their ETFs. Unlike mutual funds that trade at the end of the business day, ETFs can be bought and sold at any time of the day. ETFs are not without risk , so be sure to research each fund thoroughly before making any trades.

Watch how they react to different market conditions and understand what companies are included in the fund and why they are included. As with any investments, if you have any questions or concerns, be sure to consult a financial professional such as an adviser or your broker. Learn about our editorial policies. Reviewed by Chip Stapleton.

Learn about our Financial Review Board. IT or data-and-analytics vendors can support insurers on a specific part of the process or value chain, from underwriting increasingly granular packets of risk including liabilities previously aggregated with larger segments or seen as unfavorable to gathering data and adjudicating claims without a human adjuster.

Traditional brokers also seek out tech to support their growth and maximize agent time spent on value-added activities. For example, they are increasingly leveraging customer relationship management in conjunction with intelligent lead matching or dashboards and streamlining the digital experience for agents in small commercial lines. In our experience, this can lead to a reduction of up to five hours a week in the work required for submissions, freeing up valuable time for agents.

Adding to the fray are the increasing numbers of digital-native distributors that build their own technology. These distributors use their homegrown tech as a point of differentiation and a faster route to online channels in some lines. Because they often struggle to manage costs—for customer acquisition, for example—digital distributors are also adding products and acquiring balance-sheet capabilities to expand their presence along the value chain.

However, even the most mature distributors that have gone public have yet to prove this strategy leads to long-term profitability—their loss ratios hover above percent compared with a more typical ratio of approximately 70 percent for established insurers. Likewise, the increasingly granular segmentation and data usage enabled by technology providers will continue to gain traction in the marketplace.

Both digital-native and traditional insurers are becoming more adept at identifying niche customer segments and using data and analytics to serve them well. This model enables rapid growth from homes that less tech-advanced insurers might charge higher rates, serve at a higher combined ratio, or decline to serve at all.

Specialty insurance, which covers unique risks or special circumstances, and reinsurance have continued to attract investor interest in the face of ongoing market hardening. However, in the past decade, growth of alternative capital has increased supply in the specialty market, making the class of different from prior classes in several ways:. On the distribution side, major mergers increase market consolidation in the long term, but they have also provided an opportunity for smaller brokers to retain key talents and assets during the transition.

As a result, the competitive landscape for specialty brokers is becoming more dynamic and fragmented, with a strong tier of up-and-coming brokers likely to pursue aggressive growth in the next few years, particularly in London. In addition, the number of managing general agents MGAs and the players that support them, such as fronting carriers, continues to grow.

While investing in specialty carriers and brokers in the hard market has become a proven model for value creation, investors can now also look beyond that for two new types of opportunities. First, data and insights are playing a more important role in underwriting specialty insurance and reinsurance.

Investing in data and service vendors focused on complex emerging perils—including cyber, political, renewable, and environmental—could unlock new sources of value. Second, new business models that match capital more efficiently with risks—including exchanges, MGA platforms, and syndicated structures—will continue to gain traction in the market in the long term. With recent moves to take insurers private, sophisticated PE investors are buying blocks of policies and assuming those risks—and billions in assets often come with that risk.

As insurers are under pressure to divest assets and liabilities that were underwritten at much higher rates, GPs have both the investment capabilities to manage the assets and the culture and skills to build the operational capabilities to handle the policies. Specifically, investors that combine operating capabilities with skill in managing investments and maximizing returns have a clear value proposition, making management teams more comfortable in taking over their blocks and customers.

Meanwhile, PE investors see significant value in long-term capital with a life cycle beyond that of a typical fund, reducing the fundraising burden on GPs and increasing through-cycle investment flexibility. Purchasing divested blocks also provides income diversification and a predictable, captive stream of fee income.

For example, after a long track record in insurance vehicles, one investment management firm reported that nearly half of its assets under management were in insurance, amounting to half of all management fees earned. Structural changes in the US insurance industry—such as heightened risk for directors and officers and ongoing risks related to the pandemic and climate change—will continue into the foreseeable future.

Savvy investors playing the long game in insurance can seek pockets of opportunity among these challenges by, for instance, investing in specialty insurers writing small-business cyberrisk for which there is increased need, and partnering with ecosystem players using superior climate data to price risk at a granular level.

Consolidation will continue across sectors, but accessible targets that are both mature and profitable are becoming increasingly sparse. Many available nonpublic entities are either very small or very large, especially in the technology space, and PE investors face increasing competition from other forms of capital. SPAC deal momentum also increased the competition, with several multibillion-dollar announcements since the third quarter of Strategic investors namely, insurance carriers and distribution players are closing similarly sized deals in , including the sale of annuity units to mutual insurers or other offshore insurers that are not subject to the disclosure requirements facing US publicly traded entities, as well as the purchase of multiple independent distribution networks and platforms.

PE investors will need to become more creative in sourcing deals—for example, by creating earlier-stage and growth-equity funds, co-investing with venture capitalists or insurers, taking public companies private, or aggregating smaller targets to achieve scale beyond classic broker and third-party administrator roll-ups.

Finally, implementing operational improvements continues to increase in importance relative to capturing structural differences in valuation multiples. While consolidation opportunities remain, in a competitive market a business-as-usual approach is increasingly insufficient to acquire attractive targets and achieve multiples arbitrage. Across sectors, investors need a differentiated value-creation thesis to succeed—for example, by vertically integrating, automating claims processes and services, improving agent productivity, and monetizing data-and-analytics use cases across the value chain.

In recent years , private equity PE firms in the insurance industry have realized impressive returns. They have profited from multiple arbitrage, particularly in the heavily fragmented insurance brokerage space. PE-backed providers of distribution technology—such as performance-marketing and agency-management players—have recorded fast growth while maintaining strong cash flows.

Investors have also created value in insurance services by building dominant positions in the relatively mature claims-management space and by consolidating human resource information systems HRIS and benefits-administration services on the same platform. From to , the PE-backed brokerage deals completed in the United States accounted for roughly three-quarters of the total insurance deal volume in terms of the number of transactions.

Given record levels of available capital and successful exits, PE activity and competition for insurance assets has intensified. PE investors also must compete with conglomerates and insurers themselves that are investing more money, more often. As a result, multiples are high and holding. Further complicating matters, trends and macroeconomic forces, most notably the COVID pandemic, are reshaping the value-creation levers of the past.

To varying degrees, the pandemic is causing ongoing disruption. Drastic improvements in productivity are likely necessary to maintain profitability in this low-interest-rate and often lower-premium environment. And amid an economic downturn in which pure multiple arbitrage may not be possible, operational value creation becomes even more important. Moreover, there is added opportunity for private capital to take undervalued public companies private.

To shed light on potential investment opportunities in insurance, we took a comprehensive look at the value-creation levers in the industry. To facilitate our analysis, we classified insurance-related companies as distribution players, service players, or technology providers. In addition to investing in these insurance ecosystem providers, many leading PE firms have shifted to employing permanent capital from insurance balance sheets to drive growth.

Here, we articulate potential investment recommendations for the three ecosystem segments to guide PE investors as they navigate this complex and dynamic industry in the years to come. In addition, we articulate the rationale for investing in insurance balance sheets as permanent sources of capital. Services providers and distribution companies outside of personal auto and homeowners are historically the most popular and profitable for PE deals in insurance, achieving more than 15 percent EBITDA 3 3.

The COVID pandemic has changed the distribution landscape, though long-term effects remain uncertain. New-business premiums for North American life and annuities dropped by about 10 percent in May but had more than recovered by July. Personal lines are expected to be less affected by the economic fallout of the pandemic, but new auto policies will likely decline as GDP declines.

Previous recessions have shown that the insurance brokerage industry is not immune to declining economic activity. Historically, however, the industry has proven resilient, and institutions more adaptable to the new realities of working—such as businesses with digitally focused and enabled sales forces and infrastructure to withstand exacerbated cyber exposures—will outperform others.

These institutions may also have the opportunity to acquire distressed sellers and hire strong producers. A long tail of targets is available, including more than 30, middle-market and 8, EB brokerages. However, some of these brokerages that are small businesses themselves rely heavily on paper or face-to-face interactions. Also, brokerages that primarily serve small enterprises may struggle to survive in the current environment, and valuations are likely to come down as a result.

Additionally, small enterprises the most common customers for middle-market brokerages are most susceptible to prolonged economic challenges. Therefore, PE firms will need to look for new sources of value, such as organic growth and productivity—for example, optimizing insurer and wholesale pricing strategies, digitizing, and using analytics at scale—to drive growth in the future.

The still-fragmented space of life-and-annuities managing general agents MGAs and insurance marketing organizations IMOs has recently attracted investor attention. One leading IMO has acquired more than 20 companies since This consolidation occurred despite the expected decrease in overall life and annuities sales, as lower face-amount policies that do not require a medical underwriting exam are more easily sold via phone or digital platforms and may prove resilient.

In fact, amid the COVID pandemic, traffic to online life insurance sites has increased, suggesting a near-term, growing interest in life insurance products. Prior to the COVID pandemic, this spending was growing, and that growth continues as face-to-face sales become nearly impossible.

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PE investors will need to become more creative in sourcing deals—for example, by creating earlier-stage and growth-equity funds, co-investing with venture capitalists or insurers, taking public companies private, or aggregating smaller targets to achieve scale beyond classic broker and third-party administrator roll-ups. Finally, implementing operational improvements continues to increase in importance relative to capturing structural differences in valuation multiples. While consolidation opportunities remain, in a competitive market a business-as-usual approach is increasingly insufficient to acquire attractive targets and achieve multiples arbitrage.

Across sectors, investors need a differentiated value-creation thesis to succeed—for example, by vertically integrating, automating claims processes and services, improving agent productivity, and monetizing data-and-analytics use cases across the value chain. In recent years , private equity PE firms in the insurance industry have realized impressive returns.

They have profited from multiple arbitrage, particularly in the heavily fragmented insurance brokerage space. PE-backed providers of distribution technology—such as performance-marketing and agency-management players—have recorded fast growth while maintaining strong cash flows. Investors have also created value in insurance services by building dominant positions in the relatively mature claims-management space and by consolidating human resource information systems HRIS and benefits-administration services on the same platform.

From to , the PE-backed brokerage deals completed in the United States accounted for roughly three-quarters of the total insurance deal volume in terms of the number of transactions. Given record levels of available capital and successful exits, PE activity and competition for insurance assets has intensified.

PE investors also must compete with conglomerates and insurers themselves that are investing more money, more often. As a result, multiples are high and holding. Further complicating matters, trends and macroeconomic forces, most notably the COVID pandemic, are reshaping the value-creation levers of the past.

To varying degrees, the pandemic is causing ongoing disruption. Drastic improvements in productivity are likely necessary to maintain profitability in this low-interest-rate and often lower-premium environment. And amid an economic downturn in which pure multiple arbitrage may not be possible, operational value creation becomes even more important. Moreover, there is added opportunity for private capital to take undervalued public companies private.

To shed light on potential investment opportunities in insurance, we took a comprehensive look at the value-creation levers in the industry. To facilitate our analysis, we classified insurance-related companies as distribution players, service players, or technology providers.

In addition to investing in these insurance ecosystem providers, many leading PE firms have shifted to employing permanent capital from insurance balance sheets to drive growth. Here, we articulate potential investment recommendations for the three ecosystem segments to guide PE investors as they navigate this complex and dynamic industry in the years to come. In addition, we articulate the rationale for investing in insurance balance sheets as permanent sources of capital.

Services providers and distribution companies outside of personal auto and homeowners are historically the most popular and profitable for PE deals in insurance, achieving more than 15 percent EBITDA 3 3. The COVID pandemic has changed the distribution landscape, though long-term effects remain uncertain.

New-business premiums for North American life and annuities dropped by about 10 percent in May but had more than recovered by July. Personal lines are expected to be less affected by the economic fallout of the pandemic, but new auto policies will likely decline as GDP declines. Previous recessions have shown that the insurance brokerage industry is not immune to declining economic activity.

Historically, however, the industry has proven resilient, and institutions more adaptable to the new realities of working—such as businesses with digitally focused and enabled sales forces and infrastructure to withstand exacerbated cyber exposures—will outperform others. These institutions may also have the opportunity to acquire distressed sellers and hire strong producers. A long tail of targets is available, including more than 30, middle-market and 8, EB brokerages.

However, some of these brokerages that are small businesses themselves rely heavily on paper or face-to-face interactions. Also, brokerages that primarily serve small enterprises may struggle to survive in the current environment, and valuations are likely to come down as a result.

Additionally, small enterprises the most common customers for middle-market brokerages are most susceptible to prolonged economic challenges. Therefore, PE firms will need to look for new sources of value, such as organic growth and productivity—for example, optimizing insurer and wholesale pricing strategies, digitizing, and using analytics at scale—to drive growth in the future.

The still-fragmented space of life-and-annuities managing general agents MGAs and insurance marketing organizations IMOs has recently attracted investor attention. One leading IMO has acquired more than 20 companies since This consolidation occurred despite the expected decrease in overall life and annuities sales, as lower face-amount policies that do not require a medical underwriting exam are more easily sold via phone or digital platforms and may prove resilient.

In fact, amid the COVID pandemic, traffic to online life insurance sites has increased, suggesting a near-term, growing interest in life insurance products. Prior to the COVID pandemic, this spending was growing, and that growth continues as face-to-face sales become nearly impossible. Because analytics now make it easier for insurers to assess ROI, they are increasingly comfortable outsourcing to digital intermediaries the work of generating leads, recommending products to clients, and offering them advice.

PE firms have historically invested in performance-marketing players to expand their digital marketing capabilities, while other intermediaries have attracted investments from incumbents. Many insurers have seen their valuations reduced in recent months, and there is ongoing uncertainty about the environment. High expense ratios are likely to become more prevalent, and many insurers are looking to reduce overall spending, potentially by outsourcing some activities to third-party service providers.

Yet service providers also face a potential challenge: the COVID pandemic has lengthened the time it takes for policy administration and claims processing. Offshored services, in particular, initially faced significant disruptions. For example, prior to the start of the pandemic, workers were required to check cell phones at the office door to protect information, a policy that needed to be completely rethought in new work-from-home arrangements. While the short-term disruptions have been resolved, they have prompted insurers to reconsider business resilience plans and increase efforts to automate.

The number of claims has started to increase, however, as many places reopen. In addition, demand for claims services in disability and the need for fraud mitigation across lines have increased. As small enterprises falter and employers of all sizes lay off employees, benefits administration and HRIS players will also face significant pressure on profits. Furthermore, revenue sharing, another source of income for benefits administration and HRIS players, will also likely decline as employers and employees drop insurance policies.

In the past, PE firms have generated value in claims through acquisition—they realized scale efficiencies and expanded to additional products and parts of the value chain. This activity, however, has created dominant players that have left very few attractive acquisition targets in the market. Going forward, PE-backed players can combine continued acquisition with efficiency-focused and value-added services to insurers in the downturn. We expect an overall trend toward consolidation to continue with more providers offering both HRIS and benefits-administration services on the same platform.

Such players use work-site selling and decision-support tools to drive benefits adoption and become more active partners for brokers and employers. Technology providers are benefiting from a booming ecosystem of start-ups that help insurers automate their businesses. Influenced by the current environment, insurers are using analytics to increase process efficiencies that reduce costs and to evaluate large sets of data to generate other insights.

Robotic process automation and intelligent process automation, combined with cognitive automation and analytics across business lines, drive productivity and accuracy in business processes with near-zero error rates. PE firms have backed distribution technology players, including agency management systems AMS that have recorded consistent growth and maintained strong cash flows. AMS and other distribution technologies have created value through increases in pricing, penetration, and cross-selling ancillary solutions.

Today, to keep pace with product innovation and online and direct capabilities, more insurers are turning to third-party solutions, which allow insurers to modernize their tech stacks and every step of their processes. Such solutions are sticky, on account of ten-year or longer replacement cycles and stable cash flows. The claims services and technology market is highly concentrated. PE firms have owned a few large players for more than a decade and may be looking to exit when there is less volatility.

Current PE owners have invested in operational efficiencies and pricing optimization. More recently, these providers are looking to evolve into end-to-end claims decision players through automation and analytics. Insurance capital delivers on several investment objectives. It is long-term capital with a life cycle beyond that of a typical fund, particularly for alternative asset classes such as credit and real estate.

It provides a stream of fee-related income, which in turn provides a diversified source of earnings and is seen as a major valuation driver, particularly for publicly listed firms. And it is an attractive investment opportunity on a stand-alone basis, as its comprehensive value-creation approach delivers 10 to 14 percent internal rates of return.

Stock Advisor. View Our Services. Our Purpose:. Latest Stock Picks. Source: Getty Images. MetLife has an easy-to-understand business model and a history of strong returns on equity. Plus the company pays one of the highest dividend yields of its peer group, which can significantly boost total returns over time. Not only does Markel typically run a nice underwriting profit, but the company has an interesting investment strategy.

Instead of solely focusing on safe investments, such as high-grade bonds , Markel puts about one-third of invested assets in publicly traded stocks and also buys entire businesses through its Markel Ventures segment. The company serves more than 75 million people worldwide and has one of the best net margins in the industry.

Plus UnitedHealth has a track record of shareholder-friendly management. Did You Know? How insurance companies make money One of the most important things to understand before buying any stock is how the company makes its money. 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. 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.

Combined ratio: This is the combination of the loss ratio and the expense ratio. Source: The Motley Fool. Auto and homeowners insurance are two common forms. Renters insurance and pet insurance are two other common examples. 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. 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. In order 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.

Bank stocks Learn more about the largest part of the financial sector. FinTech stocks A broad category that covers businesses at the intersection of financials and technology. Blockchain stocks The underlying technology behind cryptocurrencies has many potential applications. Dividend stocks Insurance businesses are often dividend payers. Learn more about dividends here. A recession-resistant business with excellent return potential Insurance companies have highly attractive economics.

What are the best insurance companies to invest in? Metlife Markel UnitedHealth. What are the best health insurance stocks? Top five health insurance stocks in terms of market cap the size of the company calculated by the shares outstanding multiplied by the share price : UnitedHealth Group Anthem CVS Health Cigna Humana. The Motley Fool has a disclosure policy. Motley Fool Returns Market-beating stocks from our award-winning analyst team.

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