The most beautiful thing about insurance companies is that – when done correctly – they essential get paid to hold money, on which they can earn interest. The scariest thing about insurance companies is that insurance is essentially a commodity, and if the actuaries misjudge risk, the insurance company can lose a lot of money, or even go bankrupt. Well-run insurance companies can be great investments, just ask Warren Buffett, who has invested a significant proportion of his wealth in insurance businesses. Interest rates have been low for a long time. If and when they increase, insurance companies will benefit. Here are five Australian insurance companies for your watchlist.
NIB Holdings Limited (ASX: NHF)
NIB is a health insurance company that has between 7% and 8% of the market. Because the company has a strong online presence, its customers tend to be younger. That means it pays out less to cover their illnesses than other insurers who insure older people. This means that the company ends up paying huge sums to other insurers, because the risk-equalisation policies require it. However, the company does still accrue some benefit for having healthier clients. With income of over $18 billion, health insurance is a good industry to be in, not least because the current government envisages a greater role for private health insurers in the future.
QBE Insurance Group Ltd (ASX: QBE)
QBE is Australia's largest insurer and has a global reach. It offers many types of insurance but has had a terrible time with some of its US lines of late, and as a result it trades at a trailing P/B of 1.27. In the past I've been concerned that huge property insurers such as QBE will suffer from wilder weather over the long term, but the Oracle of Omaha has said that the weather events in the last 10 years have not been unusual. He said recently on CNBC that, "so far the affects of climate change, if any, have not affected the insurance market." He continued to say that he loves, "apocalyptic predictions", because they probably push rates up. Judging by those comments, I wouldn't be surprised if QBE is a good long-term investment.
Cover-More Group Ltd (ASX:CVO)
Cover-More is a recently listed travel insurance company that has seen its share price soar over 20% since February. Cover-More travel insurance is sold by Flight Centre Travel Group Ltd (ASX: FLT). This is a blessing, because Flight Centre sales are driving gross written premium growth, but also a curse, because if they lost that sales channel, they would see their profits flatten or reduce. According to my own market research, Cover-More has a slightly cheaper and more flexible offering than GIO. The company also owns medical assistance businesses overseas, which can come to the aid of the travellers it insures.
Insurance Australia Group Limited (ASX: IAG)
IAG is up just a little since I recommended it as a solid blue-chip stock, and I think it still represents decent value. The company has recently expanded by acquisition. Ironically, it was only around six years ago that QBE attempted to take over IAG, offering to pay with a combination of QBE shares and cash. Luckily for IAG holders, the board rejected the proposal, which is just as well, because the QBE share price is down by around 50% since then. IAG mainly insures cars and homes in Australia, so its main risk is catastrophic weather events along the east coast.
Clearview Wealth Ltd (ASX: CVW)
Clearview Wealth has a network of financial planners, is a fund manager, and is also a life insurer. Clearly, its own financial planners are able to sell its own funds and its own life insurance. The company has turned its prospects around in recent times, and reports higher life insurance premiums and net inflows to its funds. It currently trades at 77c per share, having successfully raised capital at 65c per share not long ago.
It is most important to choose an insurer with a fine history of profitability, that is likely to grow its dividend over time. In this regard, I believe QBE, NIB and IAG are the safe stocks at good prices, although I haven't bought in myself. Personally, I favour NIB because its relatively small size will make growth more attainable, but Clearview Wealth is interesting as an option with a higher risk and higher potential return. Although I'm yet to pull the trigger and buy any of these companies, I was close to buying NIB last year because of its growth potential. There can be no doubt that IAG's trailing dividend yield of 6.2% is impressive.
