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Is your auto insurer a good stock investment?
All stock market investments carry some level of risk. Investing in your auto insurance company is sort of like betting on yourself, in a small way. Will you avoid a claim next year? That would be good for stock performance.
It's important to do your own research before investing in any stock, but many experts think that auto insurers are a good investment right now because premiums are continuing to rise, and drivers are logging more miles as gas prices subside, according to a report by the financial and investment banking firm Stifel Nicolaus.
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Lower gas prices and an improving economy that puts more job commuters behind the wheel are good for insurers because they'll lead to more cars on the road that need insurance, says Robert Hartwig, president of the Insurance Information Institute.
While not wanting to give investment advice, Hartwig says that even though more driving leads to more car insurance claims, it's still good business, as long as insurance rates reflect claims costs.
"Auto insurers by and large are doing well," Hartwig says.
Despite rising premiums -- good for investors and bad for drivers -- auto insurers' stocks typically hinge on three forces: competition, catastrophes and expense ratios. Premiums are up 3 percent in 2011, compared to being down 5 percent in 2010, Hartwig says.
"Rates are keeping pace, for the most part, with underlying cost trends," he says.
Competition
Buying stock in car insurance companies is challenging now because there is so much competition that will make them average performers in comparison to the overall stock market, says Holmes Osborne, a financial analyst in Odessa, Mo.
With so many insurers clamoring for your attention, it's hard for companies to rise above the fray.
Catastrophes
Auto insurers had a difficult 2011, with an unusually high number of catastrophe claims to pay, says John Eade, president of Argus Research in New York.
While the fundamentals of the auto insurance business are good right now, most insurance stocks aren't doing well, creating a buying opportunity at low prices for investors with a long horizon to wait for things to turn around, Eade says.
"This could be a good time to invest because stock prices are pretty cheap," he says. "The question is, "When will things improve?'"
If spring 2012 is relatively free of storm damage, that could mean a more normal year for insurers, he says.
"Can you afford another year of low returns, when in a couple of years you'll be in a better position?" Eade asks.
Expense ratios
Insurers' own investments also affect their bottom lines. Since most of those investments are in bonds, which currently have low interest rates, insurers are recording lower earnings, Eade explains.
An annual report called "Ward's 50" provides a list of insurance stocks that are performing well. The insurance consulting firm Ward Group analyzes the financial performance of more than 3,000 property-casualty insurance companies and identifies the top performers. The insurance companies on the final list for 2011 had a 13.8 percent average return on equity from 2006 to 2010, compared to 8.7 percent for the industry overall.
Low expense ratios may be part of what is driving their success. In 2010, the Ward's 50 companies had expenses relative to revenue that were 8.3 percent lower than the industry average.
The entire insurance industry is recording its strongest growth since 2005, with premiums increasing after more than seven years of decreases, Hartwig says. That should be good news for insurance companies in 2012, he says.
If you want to see an example of investment success with auto insurance companies, look no further than investor and businessman Warren Buffett. When he was starting out as an investment consultant in 1943, he knew one of the early investors in Geico. Shares were at $2 when Buffett started buying the company's stock, which is now entirely owned by Buffett's Berkshire Hathaway Inc. One share of Berkshire Hathaway now sells at more than $100,000.
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