If you’re like the average American, you probably pay several hundred dollars for auto insurance each month. You might also be wondering how much insurance companies are making off auto insurance.
Naturally, some car insurance policyholders are wondering if they can get some of their premium money back by investing in car insurance companies.
It is actually hard to determine how much money insurance companies make and where it comes from for several reasons. Many large insurers, such as Nationwide, are mutual insurance companies, which means they are owned by their policyholders. There are also privately held insurers that are part of larger companies, such as GEICO, which is part of Warren Buffett’s Berkshire Hathaway empire.
Insurance Company Revenues
If you’re interested, Berkshire Hathaway (NYSE: BRK.A and NYSE: BRK.B) reported revenues of $179.82 billion on Sept. 30, 2013. That means $179.82 billion passed through Berkshire’s accounts in the fiscal year that ended on Sept. 30, 2013. Berkshire Hathaway also reported having $42.08 billion in cash and ST investments in the third quarter (summer) of 2013. That means Berkshire had $42 billion in the bank, and a lot of that money came from GEICO, which is in the car insurance business.
Okay, so we all know Berkshire Hathaway makes piles of money, but what about some other well-known names in car insurance? Allstate (NYSE: ALL) reported a revenue figure of $35.26 billion on Sept. 30, 2013 and $3.76 billion in the bank. Progressive (NYSE: PGR) reported $18.17 billion in revenues and $1.27 billion in the bank on Dec. 31, 2013. Travelers Companies (NYSE: TRV) reported $26.19 billion in revenue and $4.18 billion in cash on Dec. 31, 2013.
So some insurance companies are awash in cash and are making money. Insurance is actually a very good business. Much of Warren Buffett’s fortune was built on the money generated by insurance companies. Basically, Warren used the money policyholders invested in his company to buy other companies and get financing for acquisitions.
The Oracle of Omaha became the richest investor in history by investing in insurance. That means car insurance stocks are actually a pretty good investment, and you can get some of the money that you send to your insurance company each month back by investing in insurance stocks.
How do Insurance Companies Make Money?
Obviously, many people will wonder how insurance companies make all that money. Well, the answer is pretty simple. An insurer wants to take in more money in premiums than it pays out in claims. That’s why insurance companies are interested in risk and looking for claims that are not that risky.
It’s also why some big insurance companies stay away from car insurance. Car insurance is actually very risky because insurance companies have a hard time determining risk from drivers. Driving records only tell part of the story, and in some cases, a very small part of the story.
That’s why there is so much competition for good drivers among car insurance companies. A good driver is money in the bank for a car insurance company, even if it offers a substantial discount on the premiums.
It is also why insurers are always looking at weird stuff, such as report cards, credit scores, and employment, when they issue a car insurance policy. This is the reason some insurance companies, such as Progressive and Allstate, are investing so much in telematics and other next generation technologies. The idea is to base insurance rates on actual driving records.
The thinking behind this is that insurers can offer a substantial discount on car insurance and attract more customers. If car insurance companies can identify good drivers, they’ll become more profitable.
The bottom line is that car insurance is a very profitable business and some car insurance companies are very good investments. Therefore, you can get some of your premium back by investing in car insurance stocks.