By James K. Glassman
From Kiplinger’s Personal Finance
Last year, the United States set a record for hugely expensive weather and climate-related disasters. The nation was hit by 28 catastrophes with total damages of more than $1 billion.
Over the past seven years, reports the National Oceanic and Atmospheric Administration, 137 separate billion-dollar disasters, including five Category 4 or 5 hurricanes, have caused more than $1 trillion in devastation.
The property and casualty insurance industry picks up much of the tab for these catastrophes. As a result, the sector recorded a total of $50 billion in underwriting losses—that is, the gap between claims and premiums—in 2022 and 2023.
P&C companies also pick up the tab for traffic accidents. The single largest share of premiums in the industry—one-third—is paid by owners of private passenger vehicles. Fatal accidents have leveled off lately, but the figure is still very high.
So how are P&C insurers’ stocks doing? One gauge is iShares U.S. Insurance, the largest exchange-traded fund for the sector. Over the 12 months ending May 31, the fund has returned 44.0 percent, more than 15 points better than the S&P 500 index.
How can these insurers pay enormous claims and still see their stocks rise? They are in a great business. Customers pay monthly premiums, and the company doesn’t have to cough up any money unless there’s a valid claim.
Insurers have something else going for them: Most of their customers have to buy their products. States require drivers to have auto insurance. Mortgage lenders require homeowners to insure their property. Landlords demand renters carry insurance.
The downside is that insurance is such a good business that competitors abound. Also, in recent years, higher inflation has increased the cost of replacing damaged automobiles and houses. But inflation has been accompanied by higher interest rates, which allow insurers to earn more when they invest their float in safe vehicles like Treasury bonds.
What about all those disasters? As risks rise, insurance companies respond by raising their rates. Auto insurance premiums have jumped 22 percent in the past 12 months. Homeowners’ insurance has increased by 23 percent to and in some states by much more.
Where to invest? Stick with the big companies like Allstate, AIG and Travelers. My favorites are Progressive and Chubb, which is headquartered in Switzerland—though Chubb focuses on high-income U.S. customers.
As for funds: The iShares ETF (exchange-traded fund) is weighted heavily toward P&C companies, with 28 percent of its assets in Progressive and Chubb, but it also owns life insurers, which I find less attractive.
Another good choice is Invesco KBW Property & Casualty Insurance. The ETF’s portfolio is less top-heavy. It includes some excellent smaller P&C carriers, such as Everest Group, which has a large reinsurance segment (backing up other insurers), and The Hartford Financial Services Group, with strong commercial and homeowners lines.
For most Americans, insurance companies have been a curse the past few years, as they have crushed household budgets with higher premiums. But if you buy their shares, you have a chance to turn insurers into a blessing.
©2024 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
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