The insurance sector offers an attractive investment opportunity for investors looking to diversify their portfolio with insurance companies that may offer appealing dividend yields. One way to assess an insurance company is to calculate its return on equity (ROE), which is one of the many measures of a company's profitability.

Key Takeaways

  • The average return on equity (ROE) for the insurance industry is roughly 20%. 
  • ROEs within the insurance vary based on the specific types of insurers, for example, the life insurers average 5.2%. 
  • Increasing ROE signals the insurer is able to effectively use its capital and improve its return. 
  • A declining ROE could be a red flag for an investor since the company may be experiencing business problems.

Insurance companies are evaluated based on their price-to-book (P/B) ratio and ROE, a factor that has the largest effect on the P/B ratio. As of 2020, the average ROE for insurance companies is roughly 20%. The ROE has varied in recent years, clocking in at 4% in 2018 and 22% in 2017.  

Understanding Insurance Returns on Equity (ROE)

ROE is calculated as the insurer's net income divided by the common shareholders' equity. A few variations on the ratio depend on which equity balance is used in the denominator. Typically, analysts use the end-of-period equity balance. 

ROE could be calculated based on average and beginning-of-the-period equity. The numerator is a net income attributable to common shareholders after preferred stock dividends but before common stock dividends.

The insurance industry consists of a wide range of players of different sizes and lines of business. An insurance business has its own niches such as accident and health insurance, property and casualty insurance, life insurance, and surety and title insurance. 

ROEs by Industry 

ROEs within the insurance vary based on the specific types of insurers. For example, the fire, marine, and casualty insurers have an average ROE ratio of 0.3%. The ROE for this particular sub-industry has fallen for several years, down from 10.5% in 2014. 

Meanwhile, life insurers have an average ROE of 5.2%, up from 4.3% in 2018. Life insurers have seen a steady uptick in ROE over the last several years, starting at 1.8% in 2014. 

Specifically, for some of the major insurers, the ROEs are as high as 30% but can be as low as 1%. For example, Progressive (PGR), which has a $46 billion market capitalization, boasts a 30.8% ROE.  

Another leading insurer with a high ROE includes Allstate (ALL) at 20.6%. Chubb (CB), with a $48 billion market cap, however, only has a 6.8% ROE. Travelers (TRV) has a 9.4% ROE. On the life insurance side, Primerica (PRI), with a $4.3 billion market cap, is the leader in terms of ROE, clocking in at 22.5%. Other major players in the insurance space include Prudential (PRU), Metlife (MET), and Aflac (AFL), which have ROEs of 6.7%, 8.9%, and 10.4%, respectively. 

The Bottom Line

When choosing an insurance company, an investor should also review ROE dynamics over time. Increasing ROE signals the insurer is able to effectively use its capital and improve its return. A declining ROE could be a red flag for an investor since the company may be experiencing business problems.