The insurance sector’s net profit margin (NPM) for 2019 was roughly 6.3%. Life insurance companies had an average NPM of 9.6%. Property and casualty insurance companies averaged 2.7%. Insurance brokers averaged 8.3%.
Individual insurance companies can have varying profitability ratios. Here’s a look at some of the sector’s top companies. To start, there’s Progressive (PGR), which has a $49 billion market cap as of April 2020. Progressive, despite its size, is able to generate a 10.1% NPM over the trailing twelve months (TTM). Progressive’s operating margin is 13.7%.
Now, there’s a host of other insurers, including Chubb (CB), Allstate (ALL), and Travelers (TRV). Of these major insurers, Travelers has the lowest NPM at 7.6%. Chubb and Allstate have NPMs around 10%. The biggest names on the list have the highest NPMs. Smaller companies in the insurance sector struggle to generate profitability margins as high as them.
For example, smaller players in the property-casualty insurance industry, such as Loews (L) and AXS Capital (AXS) have NPMs around 6%.
Expenses of Insurers
Costs for firms in the insurance business include the money the insurer pays to service providers. For health insurers, this would be payments made to hospitals or doctors. In the case of automotive insurance, this includes payments made to repair shops or medical costs if injuries were involved.
Changes in the costs of services rendered, policy price changes, and the number of claims received are all factors that can cause an insurance company’s net margin to change from year to year. For the purposes of long-term evaluations of companies in the insurance business, analysts consider annualized net margin data to be the most useful information.
Insurers and Profit Margins
The calculation of net margins is significant to companies in the insurance sector because the values are so low. Many insurance firms operate on margins as low as 2% to 3%. Smaller profit margins mean even the smallest changes in an insurance company's cost structure or pricing can mean drastic changes in the company's ability to generate profit and remain solvent.
For example, the net profit margin for Aegon (AEG) is 2.1%. The life insurer, which has one of the lowest NPMs in the industry, also has other low profitability measures. Its return on assets (ROA) is 0.3%, while its return on equity (ROE) is 6%. Compare that to one of the top life insurers in the industry, China Life (LFC). China Life has a 7.9% NPM and return on equity of 16.5%.