Investing in insurance companies
There are two primary reasons why you might want to consider investing in insurance stocks. First, insurance companies can deliver solid long-term returns. Second, the business models of insurers tend to make them resilient during economic downturns.
Insurance stocks are usually seen as good picks for conservative investors. However, they're not immune to steep sell-offs. For example, UnitedHealth Group's (UNH +0.64%) shares fell sharply in the second half of 2024 and into 2025 due to multiple headwinds.
Even aggressive growth investors might like certain insurance stocks. Trupanion (TRUP +1.33%) especially stands out as a potential choice for growth investors. The company provides medical insurance for cats and dogs.
Evaluating insurance companies
While there are many ways to evaluate insurance companies, a few especially stand out. They fall into two general categories: Financial strength and competitive position.
To evaluate an insurance company's financial strength, first look at its credit ratings from agencies such as AM Best, Fitch, Moody's (MCO -1.52%), and S&P Global (SPGI -1.48%). The strongest companies will have AAA, Aaa, or A++ credit ratings.
Two other important metrics to consider related to an insurance company's underwriting health are the combined ratio and the loss ratio. The combined ratio reflects the total of the insurer's losses and expenses divided by its earned premiums. A level below 100% indicates underwriting profitability. The loss ratio is the dollar value of claims paid out divided by premiums collected. A company can't succeed with a loss ratio above 100% for too long.
You can learn a lot about an insurance company's competitive position by checking out its market share. The higher the market share, the more dominant the company is in its industry. Customer retention rates can help you assess how well an insurer is holding onto its market position. You can also research an insurer's complaint index score, which is available on the National Association of Insurance Commissioners (NAIC) website. A complaint index well above the national median of 1.0 could indicate potential underlying business problems.
If you're considering investing in an insurance stock, the metrics used to evaluate any stock also apply to insurers. Key metrics to check out include the stock's return on equity, return on invested capital, and price-to-earnings (PE) ratio compared to its peers.
