Like many stocks, the best insurance company stocks have a few things in common.
You can’t talk about the best insurance company stocks without talking about insurance. Health insurance, life insurance, auto, home, pet, renters, business – there’s an insurance company to cover just about anything you can think of. And insurance itself can be complicated; ever try figuring out your deductible vs. copay vs. benefits from a visit to the emergency room? Good luck.
That confusion turns a lot of investors away from insurance stocks. That’s unfortunate, since some of the best insurance company stocks can bring in pretty substantial returns. Back in 2012, Warren Buffett had this to say about insurance stocks: “Insurers receive premiums upfront and pay claims later. … This collect- now, pay-later model leaves us holding large sums—money we call float—that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit.”
This money is a liability, since the insurance company may one day need to pay it back on a policy claim, so “it’s usually possible to buy the float at a tremendous discount to its actual intrinsic value.”
He should know, of course. Buffett started his own investment company in the late 1950s. His initial investments were in Berkshire Hathaway, a textile manufacturing company based in New Bedford, Massachusetts, and GEICO General Insurance Co. These became huge successes and provided the foundation to generate large investment profits and cash flows.
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Great. Now, what are the best insurance company stocks to invest in?
First, let’s point out the obvious – a poorly managed insurance company can quickly lose a lot of money and fail to make a profit. To make smart choices and find the best insurance company stocks, you have to start by looking for well-managed companies with a history of consistent profits.
How do you find those? There are several metrics you can look at, but one of the most important is cash flow. Cash flow is a summary of how the company made and spent its money. Ideally, this is a positive number, or at least trending positive.
Another useful metric to look at is the price-to-earnings ratio. The price of one share of a company’s stock divided by four quarters of its earnings per share (usually the last four quarters, the trailing P/E ratio), the P/E ratio is of utmost importance in determining if a company’s shares are overvalued or undervalued. If a company’s P/E is more than 35, it might be too pricey. You may want to stick with companies trading at lower P/Es, particularly if you are relatively new to investing.
In addition to that, dividends are almost always a sign of a promising stock. UnitedHealth Group (UNH), for example, has raised its dividends steadily since 2010, and the stock is up more than 10% this year.
Considering all that, here are possibly two of the best insurance company stocks. I say possibly, because these won’t be right for every portfolio. There can be some volatility in insurance stocks. Loss limits and diversification can help you with that, of course. But it’s good to be aware.
Ameriprise Financial (AMP) is first on the list. Ameriprise is a financial services company offering insurance products (life, home & auto insurance, and annuities), asset management (investment advice and investment products), and wealth management services (brokerage and banking services) to retail and institutional clients. The company has raised dividends steadily since it spun off from American Express (AXP) in 2005, and the stock is on the rise after some early stumbles this year.
Athene Holdings (ATH) is another option. It’s an insurance company whose primary businesses are annuities and the reinsurance of retirement products. The company has $144.2 billion in assets, and is domiciled in Bermuda. Athene operates with a conservative focus on downside protection, providing investors with a lower-risk growth stock opportunity. It carries an A rating from three major rating agencies. And the company is actively expanding its retail, reinsurance, and institutional product distribution platforms.
The stock is down 24% this year, though all of those losses (and then some) came during the February-March market crash. Since then it has gained ground, stabilized, and could be on the cusp of a potential breakout.
What would you add to a list of the best insurance company stocks? Share your ideas in the comments.