Insurance companies offer products that most of us need and in doing so take on many of the risks that we don't want. Insurance companies tend to be viewed as big, relatively boring financial institutions, but they are, in fact, in the business of protecting others from financial harm and 澳洲幸运5官方开奖结果体彩网:risk management.

Demutualization of the Insurance Industry

Historically, insurance companies were structured as 澳洲幸运5官方开奖结果体彩网:mutual companies, owned by the policyholders and operated only for the benefit of policyholders. On the other hand, stock companies are owned by 澳洲幸运5官方开奖结果体彩网:shareholders and they seek to maximize return to shareholders. In recent years, many mutual companies have converted into stock companies in a process called 澳洲幸运5官方开奖结果体彩网:demutualization. Because mutual companies do not issue shares to the public, only stock companies can be invested in the 澳洲幸运5官方开奖结果体彩网:stock market.

Insurance companies sell policies that promise to payout a benefit to the policyholder if a covered event occurs during the term of the policy. With 澳洲幸运5官方开奖结果体彩网:life insurance, the covered event would be death of the insured. With 澳洲幸运5官方开奖结果体彩网:homeowners insurance that might be a house fire, storm damag♓e or theft.

In exchange for the 澳洲幸运5官方开奖结果体彩网:insurance coverage, the policyholder pays the insurer premiums, which a💜re invested to earn a profit for the company until they are needed to pay out 💦claims.

Investing in Insurance Companies

Insurance companies have unique circumstances that make their analysis different from other financial institutions such as banks or lenders.

All insurance companies have a set of future liabilities that they are contractually obliged to pay out given a 澳洲幸运5官方开奖结果体彩网:qualifying event. As a result, they must invest premiums received conservatively in order to have a ready reserve of 澳洲幸运5官方开奖结果体彩网:liquid assets on hand to pay out those claims. Insurance company 澳洲幸运5官方开奖结果体彩网:portfolio managers utilize 澳洲幸运5官方开奖结果体彩网:asset-liability management (ALM) by matching assets to liabilities; rather than the more familiar asset꧑-only management that looks to maximize return while minimizing portfolio risk.

Insurance company portfolios are therefore largely made up of 澳洲幸运5官方开奖结果体彩网:fixed-income securities like high-quality 澳洲幸运5༺官方开奖结果体彩网:bonds issued by the U.S. government or AAA-rated bonds from large corporations.

Generally speaking, there are two general types of insurance companies outside the health sector: Life insurance and property and 澳洲幸运5官方开奖结果体彩网:casualty insurance. Eaღch has special considerations that investorsᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ should consider.

Life Insurance Companies

When evaluating life insurance companies, it is important to know that 澳洲幸运5官方开奖结果体彩网:government regulation directs them to maintain an 澳洲幸运5官方开奖结果体彩网: asset valuation reserve (AVR) as a cushion against substantial losses of portfolio value or 澳洲幸运5官方开奖结果体彩网:investment income. Therefore, these companies tend to have less financial leverage at work than other kinds of financial institutions. This poses potential valuation problems since it implies that insurers value assets at 澳洲幸运5官方开奖结果体彩网:market value but liabilities at 澳洲幸运5官方开奖结果体彩网:book value.

澳洲幸运5官方开奖结果体彩网:Actuarial science has developed 澳洲幸运5官方开奖结果体彩网:mortality tables that are very good at determining on average when life 澳洲幸运5官方开奖结果体彩网:insurance claims will come due as policyholders pass away. The size of those liabilities are also known in advance because life insurance policies are issued with stated 澳洲幸运5官方开奖结果体彩网:death benefits which do not adjust with inflation. Since both the amount and expected timing of liabilities are fairly well known, these companies seek to invest in portfolios that match the size and duration of those liabilities. The amount of excess return, or the amount by which assets exceed liabilities is referred to as the surplus. Maximizing surplus value and stability are the main objectives of life insurance portfolios. Because life insurance policies typically do not pay a be🅘nefit for many years, the investment portfolio of these companies tend to consist of high-quality bonds with🎶 maturities many years out.

Life insurance companies must also consider 澳洲幸运5官方开奖结果体彩网:disintermediation risk when policyholders withdraw cash value (take loans against that cash value) from permanent policies causing increased demand for 澳洲幸运5官方开奖结果体彩网:liquidity from the portfolio. This usually occurs during periods of high interest rates. At the same time, high interest rates 澳洲幸运5ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ官方开奖结果体彩网:cause the portfolios of insurers to 🤪decline since they are mai🍰nly invested in bonds, and the prices of🐎 bonds go down as interest rates go up. This combination of factors can lead to increased volatility of returns and greater risk during periods of high interest rates.

Some of the largest publicly listed life insurance companies are: MetLife (MET), Prudential (PRU), Genworth Financial (GNW), Lincoln National (LNC), AXA (AXAHY:OTC) and Aegon (AEG).

Investing in Property & Casualty Companies

Asset-liability management is crucial to property and casualty companies as well, but the risk exposures of these companies vary from life insurers in a number of areas. While the product offerings are more diverse—home, automobi𒊎le, motorcycle, boat, liability, umbrella, flood etc.—the durations of these liabilities are much shorter: generally a year or less per policy. Therefore, the investment portfolios of these companies will tend to consist of high-quality bonds with maturities of a few months to a year.

Additionally, claims can take ꦆa long time to be resolved and paid out. The claims process can be contentious and possibly spend years in litigation before the claim is paid – if it is paid at all.

Many non-life policies also carry inflation risk, as the policies promise to fully replace the value of an item, even if that item is nominally more expensive in the future due to inflation. Taken together, both the timing and amount of liabilities are more uncertain than for l꧙ife companies.

Property and casualty insurance companies also undergo an 澳洲幸运5官方开奖结果体彩网:underwriting cycle or profitability cycle, which typically lasts 3-5 years. During period of intense business competition, prices on policies are reduced to retain business and capture 澳洲幸运5官方开奖结果体彩网:market share (think of all the advertisements claiming to lower the cost of your car insurance). Frequently, prices of securities in the insurance company's portfolio fall below sustainable levels and lead to losses as claims on policies are paid out. The company must then 澳洲幸运5官方开奖结果体彩网:liquidate portfolio assets to supplement cash flow, and 澳洲幸运5官方开奖结果体彩网:share prices may drop. Insurers are forced to raise the prices of policies and profitability begins to grow once again, opening the door for renewed competition. As a result, property casualty insurance companies will tend to invest in a portfolio of 澳洲幸运5官方开奖结果体彩网:taxable bonds during the period of the cycle where losses occur and switch to non-taxable bonds such as 澳洲幸运5官方开奖结果体彩网:municipal bonds during periods of positive profits.

Some of the largest property and casualty insurance companies listed on 澳洲幸运5官方开奖结果体彩网:stock exchanges where investors can buy shares are: Allstate (ALL), Progressive (PGR), 澳洲幸运5官方开奖结果体彩网:Berkshire Hathaway (which owns Geico and a number of other insurance companies), Travelers (TRV), and Zurich (ZURVY:OTC).

The Bottom Line

Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is𝐆 a good investment and whether the economic environment is conducive to profitability f꧃or these companies.

High interest rate environments can be detrimental to life insurance companies as they face disintermediation risk. Property and casualty insurance companies are subject to the ebbs and flows of the profitability cycle. Being able to recognize when the economics of these industries are changing might make for buy or sell signals accordingly. Also keeping in mind the duration and maturities of the bonds in the portfolios of different kind♔s of insurance companies can help determine🔥 how change in interest rates will effect each.