Insurance is one of those necessary evils in life, which can be a great thing for investors. Though the market offers a plethora of companies to choose from, American International Group (NYSE:AIG) should be at the top of your list for one very good reason: It doesn't follow the pack.
Avoiding the obvious
What's the first thing that you think of when it comes to insurance? Probably your car, right?
Consumer auto insurance is one of the biggest markets within the insurance industry, thanks to the number of drivers on the road. But while the large volume of car policies may seem great at first, the market is incredibly cutthroat. Ultra-competitive pricing and a huge number of insurers offering coverage really cut into profits.
Instead of squabbling with all the players in the personal-automotive arena, American International Group plays a smarter move by focusing outside that division. This is central to AIG's MO: Instead of fighting the crowd in mature markets, it looks for opportunities to specialize. Though the company engages in several traditional lines of coverage, two of the megainsurer's divisions give serious credence to the benefits of specialization.
One of the big stories for AIG in 2013 was the overwhelming success of its private mortgage insurance operations. The company announced it would be reentering the market for mortgage guaranty early in the year and followed it up with a record year of new written premiums written -- a whopping $49.9 billion.
The 30% growth in new business, plus a decline in new delinquencies and claims, resulted in a 13-fold increase in the division's pre-tax income for the year.
One of the big factors in AIG success is the small number of companies vying for the new business. AIG is one of only a handful of PMI specialists -- allowing it to take full advantage of the big origination boom in the 2013 housing market.
Though new loan activity has dropped significantly since the third quarter of last year, AIG will have the upper hand once the housing market bounces back -- thanks to the small number of players in the this specialized market.
Insure to excess
The other market AIG dominates is excess/surplus insurance. This line of product offerings is highly specialized and includes coverage for high-hazard risks (think hurricane coverage for Gulf Coast properties), new markets (cyber security), and other unique risks (insuring an athlete's body part).
Because there are fewer regulations and fewer competitors within the excess/surplus market, insurers who successfully engage customers for their niche needs can adjust pricing for the specialty coverage, leading to higher profits.
Growth opportunities are still there
Cyber-threat insurance appears to be AIG's latest push within the excess/surplus market. It recently introduced a new add-on product to its current offerings that would provide protection against losses to property or person caused by a cyber threat.
Though the frequency of cyber attacks and breaches has been increasing, only 31% of businesses in the U.S. have cyber coverage, according to Experian. The current market of $1.3 billion in premiums is just a sliver of what AIG and the other niche players could bring in once the market matures a bit more.
Thinking outside the box
American International Group's deviation from the traditional lines of insurance products allows it to access consumers and businesses with specialized needs. By attending to these clients, the company sets itself up to take on higher risks, but at better (less regulated) pricing. And with the booming PMI operations, plus dominant excess/surplus division, the alternative risks prove to be one of the key reasons AIG is so prominent within the insurance industry, and a great investment opportunity.
Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American International Group and Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.