Quantum Wealth Summary
- If you’re not invested in the world’s largest industry by funds, you may like to take a look.
- The world is an unstable place, and that causes stress and worry.
- Attempting to protect against those problems is the job of the insurance industry.
- In this report, we look at 2 insurance stocks that deliver great income and could be poised for some growth.
At 53, John D. Rockefeller was a very unwell man.
Despite being one of the richest men in the world, he was forced to live on a pauper’s diet. It was thought he had a year to live.
As co-founder of the Standard Oil Company, years of worry and high-tension living had wrecked his health.
He’d given himself no time for recreation. No time for anything except making money.
Money had become an obsession to him.
The worry of losing it had damaged his health.
Dale Carnegie shares an interesting example in ‘How to Stop Worrying and Start Living’:
- Rockefeller once had to ship $40,000 worth of grain across the Great Lakes.
- He didn’t take out insurance, because it cost too much: $150.
- The night he was about to ship the grain, a storm broke out.
Rockefeller was consumed by worry.
He was found pacing the office early next morning. ‘Hurry’, he quavered. ‘Let’s see if we can take out insurance now, if it isn’t too late!’
They managed to get the insurance.
But sometime after, Rockefeller was found in an even worse state.
The grain had arrived safely. And now he’d wasted $150!
Rockefeller’s doctors convinced him to retire. He learnt to avoid worrying about losing money. And he managed to restore his health and live to 98.
Fortunately, most people don’t have Rockefeller’s dysfunctional view of insurance.
By the money involved, it is the world’s largest industry. Total net premiums in the US alone were $1.28 trillion in 2020.
As an investor in the markets, insurance is one sector I find attractive.
- Insurance companies tend to be large and cash generative, meaning dividend yields are high. The two stocks we’re looking at today, both currently have yields expected to be over 7% p.a.
- Because they are exposed to the financial markets via the investment of premiums, their share prices tend to be cyclical. Down with the market. Up with the market. Even when their earnings are increasing. This creates opportunity.
- Insurance businesses are defensive. It’s often the last thing people cut in a time of crisis. When the economy is down, you still need home, life, auto, and potentially other insurances.
- They’re a favourite sector for Warren Buffett. Plain and simple, he likes the fact that they generate cash with little capital cost. That cash is produced before providing their service. They collect premiums upfront. Then pay out on claims.
- Insurers also have a high degree of control over their profitability. Since they’re constantly adjusting their premiums to cover the risks. In fact, one insurance business we’re looking at today has built some competitive advantage using technology to more accurately price risk.
- There are relatively high barriers of entry to the insurance industry. Significant capital adequacy and size is required to manage insurance risk and meet regulatory obligations. Insurance companies are rated by international ratings agencies.
Now, many people may be over-insured today.
Certain types of low-claim-value insurance — for example, pet health, funerals, or motor vehicle repairs — appear as an insurance against an inability or unwillingness to save. If people could keep aside funds for these events, the insurance may not be needed.
But there is another force driving the demand for all insurance. Human nature. The widespread fear of loss, great or small.
Investment in insurance businesses has provided steady and resilient growth and income over the years for this reason.
Let’s look at 2 listed businesses that could offer strong prospects on both fronts…
