People generally don’t pay attention to the world of insurance until they need to. One poignant example is the California wildfire, said to be the costliest in California’s history, topping US$9 billion. Those complicit in starting the fire continue to be under a microscope, while the insurers destined to cut cheques to pay for losses may run for the aisle if they can.
Did you know that there are reinsurance firms whose business is to insure the insurer? Oh, the dizzying layers.
As a sector, shares in the Canadian insurers performed quite poorly during the Financial Crisis of 2008, but this sector’s recovery has been slow and steady.
Manulife Financial Corporation (TSX:MFC)(NYSE:MFC) is the largest Canadian insurer. Business is diverse both in terms of products and geography. Manulife has made moves to grow business in Asian markets, where population and economic strength are tailwinds. It is rare when Manulife misses on estimates, making it a dependable investment. The share price is currently undervalued or fairly valued based on future earnings.
Great-West Lifeco Inc. (TSX:GWO), as the name suggests, focuses on life insurance and brings in revenue from its policy premiums. The company generated $10 billion in revenue in Q3 2017 and expects revenues to continue to climb in 2018. It has been a pretty flat few years for shareholders, however, so gains come mostly from the 4.2% dividend, which is quite safe with a payout ratio below 60%.
If you like the idea of investing in life insurance but would rather have less market volatility, then you can buy Great-West preferred shares. The company has issued 13 different preferred shares along the way, which is a way to earn between 5% and 6% income on your investment. If expected earnings hold up for Great-West, then this stock is undervalued.
Power Corporation of Canada (TSX:POW) is another insurer, founded 93 years ago. It is a partial owner of Great-West. Being comprised of various subsidiaries makes this company diverse, but also amorphous. The stock is beaten up, down 4%, while the many TSX stocks have been flat or up. Power has a very low valuation compared to competitors (the price-to-earnings ratio is below 10). The cheap valuation is a sign that Power has higher risk; over a year ago fellow Fool contributor Joey Frenette expressed caution, but I am less nervous now as Power’s future is not bleak.
Take home
Insurance stocks tend to be low-risk during the good times, graduating to higher risk when a crisis disrupts normal way of life. You can find good income and value in this sector, with modest growth, which may appeal to a conservative investor.
Dividend yields tend to jive with financial institutions, like banks. The prudent insurance ethos seems to play out when management decides on how much it will pay shareholders, as payout ratios tend to be safe, below 60% of free cash or earnings levels.
However, if you see an insurance stock with a whopping dividend yield, it is a good indication that you should do more homework to make sure the company has the funds to keep the dividend going.
