We will talk about the insurance industry, which is part of the financial and health care sectors.
Since the beginning of the year, the SPDR S&P Insurance ETF (KIE) is up 19% and the S&P 500 Index is up 18%.
Types of insurance companies
– real estate insurance;
– life insurance;
– health insurance;
– reinsurance – which buys insurance liabilities from traditional insurers;
– specialized insurance – which does not fit into the list of traditional insurance companies.
Why insurance companies’ securities are interesting now
Insurance companies make money by selling and reselling insurance policies. They spend the money they get from sales (premiums) on insurance benefits and invest in financial instruments.
The balance sheets of insurance companies are designed so that when interest rates rise, interest margins rise, and thus so do the profits of such businesses.
The Fed’s QE program is expected to begin winding down in late fall and winter. Market interest rates will rise. Insurance company stocks could begin to rise along with them.
How to evaluate insurance company stocks
1) Income metrics – ROE (return on equity), net income margin;
2) Costs – loss ratio, expense ratio;
3) multiples – P/E, P/BV;
4) dividends and buybacks.
Let’s take 10 companies in the S&P 500 index with capitalization of over $30 billion.
Let’s filter by expectations for 5-year EPS dynamics (average per year, Refinitiv data).
American International Group (AIG)
Year-to-date trend: +45%
Analysts’ median target: $59.
Dividend yield: 2.4%
The company operates in three segments: AIG Property Casualty (real estate insurance), AIG Life and Retirement (life and pension insurance), United Guaranty Corporation (mortgage insurance products). AIG has rebounded nicely from the 2008 mortgage crisis.
The Refinitiv forecast calls for a 32% increase in EPS over the next 12 months, averaged over a 5-year period. The PEG indicator is equal to 0.36.
Dynamics since the beginning of the year: +13%.
Median target of analysts: $107
Dividend yield: 0.8%.
A health and life insurance company. Operates in three segments: U.S. and international insurance business, investment banking.
Prudential has successfully emerged from the recession. This was helped by focusing on expenses and selling some businesses. The forward P/E is the lowest in the sample (7.9), with a PEG of 0.55.
Year-to-date trend: +18%.
Analysts’ median target: $442.
Dividend yield: 1.2%
Health insurance company. The second-largest U.S. health insurance company in this segment by market share after UnitedHealth Group.
The coronavirus pandemic is weighing on Anthem’s earnings. That said, the company as a whole has been growing revenue for 10 straight years. The 12-month EPS guidance is. – 33.7% (second on the list). The discount to analysts’ average target is 16%.
Insurers’ losses due to natural disasters in 2021 estimated at a record $42 billion
Natural disasters in 2021 will cost insurers a record sum in 10 years. A major insurance company has calculated that to cover such catastrophes will cost about $42 billion.
Among the natural disasters specialists call the abnormal frosts in the U.S., as well as storms, hurricanes and floods in Europe.
Because of large-scale natural disasters insurance companies around the world in the first half of the year will have to allocate to cover damages about $ 42 billion – a record amount for the last 10 years.
This is just a preliminary calculation of one of the largest insurance companies in the world, the British Aon, writes “Kommersant”.
“The juxtaposition of record heat waves and record cold across the globe has brought the humanitarian and structural impacts of extreme temperatures to the forefront,” said Steve Bowen, director of catastrophe assessment at one of Aon’s divisions.
According to British insurers, the most significant costs for firms in the industry are related to coverage for damage from the abnormal frosts that swept the U.S. earlier this year.
They account for about $15 billion. At least $4.5 billion must be paid for storms and storms in Western and Central Europe in June, and another $2-3 billion for flooding in Europe.
The last time the global insurance industry losses from natural disasters experts called the record in 2010. Then in the first half of the year the damage amounted to $22 billion.