🛡️Insurance Companies

1. Introduction to the Insurance Sector🛡️

1.1. History and Evolution of the Insurance Industry 📜

The concept of insurance is not a modern invention; its roots extend to early civilizations. In Mesopotamia, for example, the Code of Hammurabi, dating back to around 1750 BC, already contained rudimentary clauses regulating liability and commercial risks, protecting merchants and their goods against eventualities such as theft or disaster during transport. Similarly, in ancient Rome, organizations like the collegia funeraticia and military compensation systems offered an early form of social security, providing compensation for accidents and deaths. These systems not only ensured the well-being of injured soldiers or the families of the deceased but also provided access to essential services for the lower classes, laying the groundwork for what is now known as life and occupational accident insurance.

A significant turning point in the history of modern insurance was the Great Fire of London in 1666. This disaster devastated the city, highlighting the fragility of assets and the urgent need for a formal financial protection system. This event catalyzed the creation of the first fire insurance companies, setting a precedent for the insurance industry. From then on, the sector began to consolidate in the 18th century, with the expansion and diversification of products to include life, fire, and marine insurance. Legal entities such as London Assurance and Royal Exchange Assurance emerged, establishing standards and improving public confidence in the sector.

The Industrial Revolution in the 19th century radically transformed the economy, driving the growth of new types of insurance adapted to emerging risks. The expansion of cities and the development of technologies required adequate protection against accidents, fires, and theft, leading companies to offer customized policies for booming industries. During this period, government regulation became necessary to protect consumers and formalize the commercial practices of insurers, laying the foundations for a more robust legal framework.

The 20th century witnessed further diversification and modernization. With increased social awareness and changes in modern life, health, automobile, and civil liability insurance emerged, adapting to the new protection needs of citizens. Health and life insurance, in particular, became critically important in helping families manage the financial risks inherent in modern life.

Finally, the 21st century has brought a technological revolution that has transformed the industry. Digitalization has enabled policy customization, driven a growing focus on sustainability, and highlighted the vital importance of cybersecurity as an emerging risk and opportunity for the sector.

The history of insurance demonstrates a remarkable capacity for adaptation over time. From its rudimentary origins to today's sophisticated industry, the sector has consistently reinvented its offerings and operating models in the face of profound economic, social, and technological changes. This intrinsic adaptability gives the insurance sector inherent resilience, making it a potentially stable long-term investment. Unlike other industries that may become obsolete, the fundamental human need to manage uncertainty and transfer risk is constant, and insurers have repeatedly demonstrated their ability to meet it in new ways.

Furthermore, the historical evolution of the sector underscores a crucial aspect: regulation. The need for regulation, as observed in the 19th century, was not simply a burden, but a decisive factor in building public trust and formalizing the industry. Without a solid regulatory framework, the sector's growth and legitimacy could have been hampered by instability or fraud. This symbiotic relationship between regulation and industry growth implies that while regulations can impose costs or restrictions, they also provide the necessary structure for stability, transparency, and consumer confidence—vital elements for a business built on long-term promises. For investors, a well-regulated market mitigates systemic risk and fosters a more predictable operating environment, even if it limits explosive short-term gains.

1.2. Key Characteristics Making it Attractive for Investment ✨

The insurance sector presents several intrinsic characteristics that make it attractive to investors seeking stability and long-term growth potential.

One of the most notable advantages is high barriers to entry. The need to comply with rigorous capital requirements, the demand for deep risk management expertise, and the complexity of regulatory compliance act as a protective moat for established players in the industry. This limits the emergence of significant new competitors and contributes to less market fragmentation in many segments.

Insurance policies, which involve the recurring payment of premiums, generate stable and predictable revenue streams for insurers. This revenue stability, combined with prudent management, often allows companies to offer attractive dividends to their shareholders, making them an interesting option for investors seeking passive income.

Although not immune to economic cycles, the insurance sector tends to show relative stability compared to other more volatile industries. The demand for insurance, especially for essential risks such as health or property, is less elastic to economic fluctuations, providing a more resilient revenue base.

Capital management and solvency are fundamental pillars in evaluating an insurer. A company's ability to meet its long-term financial obligations is essential for its stability and the confidence of policyholders. This financial strength is reinforced by the composition of its investment portfolio. Insurers invest a significant portion of their assets in cash, deposits, and fixed income (around 72.6%), with a considerable portion (48.1%) in government debt and 18% in equities. This portfolio composition is crucial for maintaining the company's solvency and liquidity.

A distinctive and advantageous feature for insurers is what is known as the "float advantage." Insurers collect premiums upfront (the "float") before they have to pay claims, which can occur months or even years later. This "float" is, in essence, interest-free capital that insurers can invest. An insurance company's profitability is therefore a combination of its underwriting profit (premiums minus claims and expenses) and its investment income derived from this float. A company with solid underwriting can generate profits even with modest investment returns, while a company with poor underwriting might rely heavily on investment income, which increases its risk profile. For investors, understanding the size and management of this float is as important as analyzing underwriting performance.

Regulation, though often viewed as a limitation, acts as a barrier to entry and a mark of quality in the insurance sector. Strict regulations, high capital requirements, and the complexity of regulatory compliance deter new competitors, creating a kind of "moat" protecting established players. This can result in a less competitive market structure, allowing consolidated insurers to maintain potentially higher margins and more stable market shares. For investors, this translates into a more predictable competitive landscape and potentially more sustainable long-term returns.

2. Business Models in the Insurance Sector 🏢

2.1. Life Insurers 💖

Within this category, there are various types of policies:

Europe: Allianz (ALV.DE) in Germany and AXA (CS.PA) in France, though diversified, have very strong life divisions. In Spain, Mapfre (MAP.MC) also has a significant life insurance area.

2.2. Non-Life (General) Insurers 🏠

Non-life insurers, also known as general insurers, focus on covering people and inanimate objects against a wide range of risks. Unlike life insurance, their contracts are usually renewable periodically, often annually.

They are mainly divided into two broad categories:

The distinctive characteristics of this business model include the short-term and renewable nature of their contracts, which implies a constant need for policy renewals and active acquisition of new customers. Furthermore, they are more exposed to claim volatility due to the occurrence of unexpected and large-scale events, such as natural catastrophes or mass accidents. This volatility directly impacts their loss ratio. Therefore, efficiency in managing operating and claims costs is crucial for maintaining profitability in this segment.

Claims Risk (Riesgo de Siniestralidad) is the main driver of profitability and, at the same time, of volatility for non-life insurers. Since these policies cover "inanimate objects" and "property and casualty insurance" and are generally short-term and renewable contracts, the core profitability of these insurers largely depends on the frequency and severity of claims that occur in a relatively short period. This directly impacts the "Loss Ratio."

Europe: Zurich Insurance Group (ZURN.SW) in Switzerland and Generali (G.MI) in Italy are major players in the non-life sector. In Spain, in addition to Mapfre, Catalana Occidente (COG.MC) is a good example.

China: Ping An Insurance (2318.HK) is one of the largest and most diversified insurers, with a significant non-life portfolio.

2.3. Auto Insurers 🚗

The most common types of coverage they offer include:

The business model of these insurers is characterized by a strong customer proximity, seeking personalized, flexible, and agile service through office networks, agents, and the use of technology. They prioritize efficiency and pricing discipline, which involves exhaustive monitoring of operating and expense indicators, and rigorous rate setting to ensure profitability.

Innovation is an important pillar, with flexibility to adapt the model to different markets and customer needs. A notable example is the implementation of behavior-based insurance, which uses telematics and vehicle data to adjust premiums according to the insured's driving habits.

Telematics and Big Data are transforming risk assessment and pricing in auto insurance. The explicit mention of "Behavior-Based Auto Insurance" that uses "telematics and vehicle data to adjust premiums" signals a fundamental shift in risk assessment, moving from traditional assessment (demographics, vehicle type) to one based on granular, real-time data. This technological advance allows insurers to price risk with greater accuracy, reward safer drivers, and potentially reduce claims by incentivizing better driving behavior. For investors, companies that successfully implement and leverage telematics data are likely to achieve lower loss ratios and higher profitability, gaining a competitive advantage. This also opens opportunities for new revenue streams through data-driven services and personalized offerings, although it requires significant investment in data analytics and cybersecurity.

United States: Progressive (PGR) and GEICO (part of Berkshire Hathaway - BRK.A) are known for their focus on innovation and telematics.

Europe: Admiral Group (ADM.L) in the UK is a major player and has been a pioneer in the use of telematics data.

Spain: Mapfre (MAP.MC) and Línea Directa Aseguradora (LDA.MC) have a significant market share in auto insurance.

2.4. Health Insurers 🏥

The main purpose of health insurers is to guarantee the insured the provision of medical services in case of accident or illness, which includes medical, surgical, pharmaceutical care, and hospitalization.

Currently, a new role is being proposed for these companies, going beyond their traditional administrative function (managing questionnaires, premiums, co-payments, and authorizations). The objective is to evolve towards a patient-centered approach, where the insurer genuinely cares about the health of its policyholders and facilitates access to the best medical resources. This implies a shift in focus towards the client's pathology, considering their medical history, current treatments, and preventive medicine.

A new health insurance model is based on several fundamental principles:

United States: UnitedHealth Group (UNH); CVS Health (CVS) (through its Aetna division); Elevance Health (ELV); Centene Corporation (CNC); Humana (HUM); Cigna Group (CI); Molina Healthcare (MOH).

When you see "Blue Cross Blue Shield" or "BCBS", keep in mind that it is not a single company. It is a federation of 34 independent, licensed health insurance companies, most of which are mutually owned or non-profit. Many companies (like Elevance Health) are part of this network and have their own stock exchange listings.

2.5. Specialty Claims Insurers 🚨🎯

Specialty claims and niche insurers are dedicated to offering protection against complex, emerging, or very specific risks that are often not addressed by traditional policies or that conventional insurers consider too difficult, high-risk, or unprofitable. This segment of the insurance market is a direct response to the evolving risk landscape in the modern business environment and the needs of very specific markets.

Among the most relevant coverages they offer are:

The business model of these insurers is based on deep underwriting expertise and personalized advice, analyzing the specific needs of each company or niche to recommend the ideal coverage. They often operate as brokers or intermediaries, allowing them access to multiple insurers and offering the best market options through strategic alliances. They focus on optimizing costs and coverages, designing plans that avoid unnecessary expenses and ensure optimal protection. Efficient claims management is a pillar, providing support throughout the process, from notification to resolution, and even intervening if the insurer does not respond in a timely manner. In addition, they use data intelligence to recommend the most suitable coverage in terms of costs and benefits.

By operating in less competitive segments, these companies can charge higher premiums for their specialized expertise. Although these risks are inherently higher, the ability to price them accurately and manage claims effectively can lead to superior underwriting profits compared to more commoditized insurance lines.

Examples of prominent listed companies in this segment include:

United States:

Europe:

2.6. Pet Insurers 🐾

Their main purpose is to provide protection for pets, primarily dogs and cats, covering the costs associated with veterinary visits, emergencies, or routine check-ups, thereby mitigating the high expenses that owners may face.

This business model not only facilitates access to affordable veterinary care for pet owners but also benefits veterinarians by attracting more clients to their practices, improving the overall veterinary business.

The range of animal insurance offerings is diverse and extends to various pet-related businesses:

United States: Trupanion (TRUP) is a leading pet insurer in North America. There are also other larger insurers that have entered this market or have dedicated divisions, even if it is not their main business.

Europe: Several insurers, including some of the large ones like AXA, offer pet insurance products in European markets.

2.7. Reinsurers 🤝

Reinsurers are companies that operate at a higher level within the insurance value chain: they insure other insurers. Their primary function is to assume a portion of the risks that primary insurance companies (those that sell policies directly to customers) have underwritten, in exchange for a portion of the premiums.

The purpose of reinsurance is multifaceted and crucial for the stability of the sector:

Regarding their business models, traditionally there were pure reinsurers, which focused exclusively on reinsurance. However, in recent years, these have become a rarity, as many seek to diversify their portfolio by branching into the primary space. This has led to integrated or diversified reinsurers, which combine reinsurance with direct insurance activities.

The global reinsurance market is highly concentrated, with major reinsurers, such as Munich Re and Swiss Re, dominating a significant market share. These large corporations maintain strong and long-term relationships with brokers and cedents (primary insurers), which gives them considerable pricing power in a market with high barriers to entry.

Reinsurers are particularly sensitive to major natural catastrophes, as they are the entities that ultimately bear a substantial portion of the massive losses generated by these events. This forces them to have sophisticated risk models and maintain high capital levels.

Europe: Munich Re (MUV2.DE) in Germany and Swiss Re (SREN.SW) in Switzerland are the two largest players in the global reinsurance market.

Spain: Mapfre Re, although it is a subsidiary of Mapfre (MAP.MC) and not an independent listed company, is a highly relevant Spanish reinsurer internationally.

3. Financial Analysis of Insurance Companies 📊

3.1. Income Statement (P&L) Specifications for Insurers 📈

The key elements found in these statements include:

3.1.1 Combined Ratio

This indicates the efficiency of the insurance business in Non-Life insurance. It is calculated as:

Combined Ratio = (Claims + Expenses) / Earned Premiums

A ratio of less than 100% indicates that the insurer is profitable from its core business. Conversely, a ratio above 100% indicates that the company is losing money on its primary business and might rely on investment income for profitability.

3.2. Balance Sheet Structure Specifications for Insurers ⚖️

The balance sheet structure of an insurance company also has peculiarities that distinguish it from companies in other sectors. The Accounting Plan for Insurance Entities (PCEA) is the framework governing their accounting, structured in five parts including the conceptual framework, recognition and valuation rules, annual accounts, chart of accounts, and accounting definitions.

The key components of an insurer's balance sheet are similar in their general classification to other companies, but with specific emphasis and details:

However, the most distinctive peculiarities of the insurance balance sheet lie in:

3.2.1 Solvency Ratio

Evaluates the insurer's ability to cover its financial obligations:

Solvency Ratio = Available Capital / Required Capital

It should be greater than 100%. If it falls below, the company needs recapitalization or corrective measures.

Technical provisions are at the heart of risk and capital management. Technical provisions stand out as a central and unique component of an insurer's balance sheet, representing "future obligations." This is not just a liability; it is the essence of their business model: managing future payments. The accurate estimation and management of these technical provisions are of utmost importance for an insurer's financial health. Underestimating them can lead to future solvency crises, while overestimating them can unnecessarily tie up capital. For investors, understanding the methodology and prudence behind these provisions is critical. It's a key area where accounting estimates directly impact profitability and risk, making it a qualitative factor to examine alongside quantitative metrics. This also directly links to the concept of "float" discussed earlier, as these provisions represent the funds generated from premiums that are available for investment.

3.3. Different Forms of Income 💰

Insurance companies are, in essence, for-profit businesses that seek to collect more than they pay out in claims and operating expenses. Their business model is based on two main sources of income, which operate in synergy to ensure their profitability and sustainability: underwriting income and investment income.

3.3.1. Underwriting Income:

This is the primary and most direct source of income, derived from the core insurance activity. The majority of this income comes from collecting premiums from policyholders. The determination of these premiums is based on a meticulous analysis of three key factors:

Risk-adjusted pricing allows insurers to maintain their financial stability, covering expected claims, operating costs, and generating profits. Efficient underwriting results in a surplus of premium income over claims payments.

Diligent claims processing, ensuring accuracy and filtering out fraud, is crucial to preserving this income, preventing unjustified payments.

3.3.2. Investment Income:

The composition of the investment portfolio is a critical aspect. Insurers manage the resources entrusted to them by their clients, investing in highly-rated companies and assets. For example, a significant portion of their investments (around 42%) is allocated to government debt securities, and they also hold positions in fixed income and equities.

An interesting concept in the income model is unearned gains. This occurs when policyholders survive term policies or decide not to renew their coverage. In these cases, the risk is transferred back to the consumer, and insurers retain the premiums paid without the obligation to cover future losses, which becomes a gain for the company.

The synergy and counterbalance between underwriting and investment are fundamental. Insurers have two main sources of income: underwriting (premiums) and investments. These are not simply two separate categories but are deeply interconnected, as the "float" generated by premiums drives investment income. The interaction between these two sources is crucial for overall profitability. Strong underwriting performance (a low combined ratio) provides a larger and more stable "float" for investment, which in turn improves financial income.

4. Key Ratios for Evaluating an Insurer

Evaluating an insurance company requires the use of industry-specific metrics that go beyond traditional financial ratios. These indicators provide deep insight into the technical profitability, operational efficiency, and financial strength of the company.

4.1. Combined Ratio 🔗

The combined ratio is a fundamental indicator that measures the technical or operational profitability of Non-Life insurance. It is, in essence, the sum of the loss ratio and the expense ratio, normally calculated on earned premiums net of reinsurance.

Its formula is simple:

Combined Ratio = Loss Ratio + Expense Ratio

The interpretation of this ratio is direct and crucial for investors:

4.2. Loss Ratio 📉

The loss ratio is a key indicator in the insurance sector that measures the proportion between the cost of paid claims and the volume of premiums collected by an insurer. In essence, it indicates the percentage of premiums allocated to paying claims.

The formula for calculating this ratio is:

Loss Ratio = (Cost of Paid Claims / Total Premiums) × 100

The interpretation of the loss ratio is crucial for evaluating profitability and efficiency in risk underwriting:

4.3. Expense Ratio 💸

The expense ratio is a financial indicator that reflects the percentage of premium income that an insurance entity dedicates to its operating expenses. That is, it measures the efficiency with which the company manages its administrative and acquisition costs.

The formula for calculating this ratio is:

Expense Ratio = (Underwriting Expenses / Earned Premiums) × 100

Where:

The interpretation of this ratio is straightforward: a low expense ratio indicates high operational efficiency and effective cost control by the insurer.

The importance of an efficient expense ratio is undeniable for the overall profitability of the insurer, as it directly contributes to maintaining a healthy combined ratio (below 100%). Optimizing this ratio is often achieved through investment in technology, which allows for process automation, reduces the need for manual intervention, and ultimately lowers administrative costs.

4.4. Solvency Ratio ✅

The solvency ratio is a vital financial metric that measures an insurance company's ability to cover its liabilities (including claims and other obligations) with its assets, and to meet its long-term payment obligations. In other words, it indicates whether the company possesses sufficient financial resources to fulfill all its commitments.

The general formula for the solvency ratio is:

Solvency Ratio = Assets / Liabilities

However, in the regulatory context, especially in the European Union, a more specific formula is used:

Solvency Ratio = (Available Capital / Required Capital) × 100

Where Required Capital can take two forms:

The interpretation of the solvency ratio is crucial for confidence in the insurer:

Sector Example: In Spain, the aggregate solvency ratio for entities stood at an average of 247% in June 2025, with significant dispersion among companies.

The importance of the solvency ratio is paramount. It is a vital metric for evaluating the financial health and long-term stability of an insurer. For consumers, it is a crucial factor when choosing an insurance company, as it gives them peace of mind that their claims will be honored.

5. Valuation of Insurers

When it comes to valuing an insurance company, there are two key financial indicators that allow us to understand both its profitability and its market valuation: Return on Equity (ROE) and the Price-to-Book (P/B) multiple.

5.1 ROE (Return on Equity)

ROE is the fundamental indicator for measuring an insurer's profitability and, in essence, how efficiently it is using its shareholders' capital to generate profits. It is calculated by dividing the company's net profit by its shareholders' equity:

ROE = Net Profit / Shareholders' Equity

A higher ROE generally indicates that the insurer is more effective at managing its capital to produce earnings. It is a crucial barometer for investors looking for companies that maximize the return on their investment.

5.2 Price-to-Book (P/B) Multiple

The Price-to-Book (P/B) multiple is a valuation tool that helps us understand how the market values an insurer in relation to its book equity. It is calculated by dividing the share price by the book value per share:

P/B = Share Price / Book Value Per Share

This multiple is particularly useful because it compares a company's market value with the value of its net assets as they appear on its balance sheet. A P/B greater than 1x suggests that the market values the company above its book value, which could indicate good growth prospects or efficient management. Conversely, a P/B less than 1x might suggest that the market perceives the company to have less value than its book assets.

It is important to note that the interpretation of P/B is often directly related to the insurer's ROE:

6. External Factors 🌪️🌊

The insurance sector, by its nature of risk management, is intrinsically vulnerable to a number of external factors. Major natural catastrophes and the constant evolution of regulations are two of the most influential elements that shape insurers' strategy, profitability, and resilience.

The impact of climate change directly manifests in the insurance sector through the increased frequency and severity of natural catastrophes. This phenomenon is continually influencing the behavior of individual events and broader weather patterns, leading to a significant increase in claims costs for insurers.

This increase in claims directly impacts the profitability of insurers. To adapt to the greater exposure to these events, some companies have adjusted their underwriting policies and increased their rates.

7. Regulations 🏛️

Regulation is a constant and highly concerning factor in the insurance sector, holding a prominent position among the main risks. Its impact is profound, shaping operations, strategy, and the very structure of the market.

The main objectives of regulation in the insurance sector are:

Key regulatory frameworks that exemplify this influence include:

The impact of regulation on operations and strategy is multifaceted:

Globally, the trend in regulation points to replacing ex-ante control mechanisms with those that guarantee a dynamic framework, with greater responsibility lying with the insurance entities themselves. The International Association of Insurance Supervisors (IAIS) works on harmonized frameworks for international solvency supervision.