Why should I care about insurance? If you have a policy with a mutual firm like USAA, the success of the firm directly affects you: your policy means you own a piece of the company and might get paid a dividend when it’s doing well. Even if you don’t, many insurers are public companies whose shares you can buy. But it can be tricky to decide which of them to invest in. After all, if you’d invested in Ping An back in 2004, your money would have increased 18 times over by September 2019. To decide, there are a few questions you’ll need to ask yourself...

How risk exposed is the insurer? If a property and casualty insurer has made most of its money selling policies in an area that’s about to be hit by a hurricane, it’s probably not an ideal investment. And there are tools – like this one, that shows you insurers’ exposure to flood risk in Florida – that help you assess exposure to a particular risk. But you’re often best off finding the company’s “financial strength rating” from ratings agencies like A.M. Best and Standard & Poor’s, which measures how likely an insurer is to meet its payouts and stay afloat. You should find these on the insurers’ investor relations sites, or by Googling it. The company’s offering can make a big difference here: a firm that makes money from asset management as well as insurance is less at risk if one of those businesses tanks.

How much does the insurer pay to borrow cash? According to Warren Buffett, the main thing that matters when evaluating an insurance business is its cost of float. That’s the underwriting loss we talked about earlier: how much it costs the insurer to borrow money. You can find this out by looking up its combined ratio – the ratio of costs to premiums, in other words. The figure’s disclosed in an insurer’s financial statement, which you can find with a quick Google.

If the insurer’s combined ratio is below 100%, it’s running an underwriting profit. In other words, it’s getting paid to borrow other people’s money. If the ratio’s sitting above 100%, it’s running a loss. That loss isn’t necessarily a problem: it’s how big the loss is that matters. For context, the US average combined ratio for P/C firms over the past 10 years is 101%.

How much does the insurer make from investing? Borrowing money is only useful if you can actually generate a return from it – so you need to make sure an insurance firm does. Check its financial statement for its investment portfolio return, and compare it to its competitors’. If you can’t find the portfolio return, divide the investment income and “other comprehensive income” (which reflects unrealized portfolio gains) by the value of assets under management. That should give you a rough percentage return.

How expensive is the insurer’s stock? By looking at a firm’s price-to-book (P/B) ratio – the value of the stock relative to the value of assets it has – you’ll be able to see how expensive its stock is compared to its peers. A good rule of thumb is that a P/B of 1 is cheap, and 2 or higher is expensive. But you’re best off making direct comparisons between the firms to see what’s cheapest. All this data is on Yahoo! Finance under the Statistics tab.

Has the stock delivered a return? This one’s simple: take a look at return on equity. That’s the profit an insurer delivers in a year divided by the company’s assets. It shows how well the company’s performing as a whole, and can be used to compare insurance stocks with other industries too. Again, Yahoo! Finance has got you covered.

And if all that seems like too much work, you could always just invest in a basket of insurance stocks with an exchange-traded fund (ETF).️ There are ETFs specifically geared toward the US and European markets, or toward individual insurance sectors like life and P/C.

So sure, insurance may seem boring, but boring is good. There’s not much hype to lead you astray, and the products are ones that people will always need. And if you know your stuff (which you totes do now), you'll know how to spot a boring company that could go from strength to strength. “Boring”? Give us boring gains over sexy losses any day of the week...

In this Pack, you’ve learned:

🔹 An insurance firm makes most of its money from investing premiums, rather than the premiums themselves (which are often outweighed by payouts)

🔹 AI and digital sales are shaking up the entire insurance industry, eliminating jobs in favor of faster processes and more accurate predictions

🔹 New global risks could benefit insurers, and emerging markets are offering growth opportunities – but low bond yields are sending investors elsewhere for returns

🔹 There are a few ways to assess insurers’ stocks, including combined ratio, risk profile, and investment income.