Insurance companies are able to grow earnings by investing the excess funds between what customers pay as premiums and what the company pays out in claims. This excess is called the "float" and if it is expertly invested, over time it can generate great returns that can be reinvested for further gains.
One of Warren Buffett's greatest investment money makers was insurance and it greatly expanded his holding company's ability to invest further in other businesses, making him the multi-billionaire he is today.
Of the major insurance companies, I believe these two stocks offer investors the best opportunities for growth and dividend income that could help you reach your own financial goals for retirement.
— Insurance Australia Group Limited (ASX: IAG)
The current market leader in general insurance, it offers a wonderful 5.7% fully franked dividend yield and over the past 10 years has increased its dividend payments by an average annual 5%.
What's good is that net profits are returning to levels it had before the GFC. Partly this is due to fewer big natural disasters in recent years. Claim payments are lower than provisions, so the surplus can be used for other purposes, and boost earnings.
— Suncorp Group Ltd (ASX: SUN)
Suncorp is one of the largest general insurers and the fifth largest bank after the Big Four banks. It will also benefit from fewer natural disasters, but in addition to that its current business restructuring is simplifying the company, improving its balance sheet strength, and it is expected to generate about $265 million in cost savings by FY 2016.
Its dividend yield is a fully franked 5.0% currently, but there may be a possible capital return from the company in the near future. That could come as a special dividend, so shareholders' total dividend payments may rise.
