If you’re a driver, you have to pay for car insurance — that’s non-negotiable.
In exchange for various forms of coverage, you pay your insurance company an annual or monthly premium. And, generally speaking, the only time you receive money from your provider is when you make a claim.
But have you considered another way insurance companies can pay you? No, we’re not talking about the rebates insurance providers handed out during the pandemic — we’re talking about buying car insurance stocks.
Is now the time to invest in Canada’s auto insurance industry? Let’s find out.
Why car insurance companies make a good investment
Some of us think about car insurance for only about five minutes each year when we should be shopping around for the best premium available to us.
But as it turns out: a product automatically purchased by a large amount of the population represents a very solid revenue stream. Car insurance is an everyday product that can be easy to build revenue projections around. It’s also a decent hedge against inflation, as it’s relatively easy for insurance companies to quickly pass along increased costs to the consumer through raising premiums.
Even though rates will always vary from company to company, global factors can contribute to a collective change in premiums across Canada. And if they rise, which they’re expected to later this year, you might as well benefit by seeing your stock’s value increase.
Many popular Canadian car insurance brands are owned by foreign companies. For example, Aviva Canada is a subsidiary of Aviva, which trades on the London Stock Exchange. The U.S.-owned insurance company Allstate also owns a couple of Canadian auto insurance providers, so if you want to add them to your portfolio, you’ll find them on the New York Stock Exchange.
Several other popular insurance companies are either privately owned (shares are not available for purchase by the public on a stock exchange) or operate under a cooperative structure where the policyholders own the company. But fear not — there are several fruitful options if you want to benefit from the solid long-term growth of Canadian car insurance providers.
Car insurance stocks to consider in 2022
Intact Financial Corporation (IFC.TO) is a large multinational company that is almost exclusively in the insurance business. For a Canadian company, it has a relatively large market capitalization of more than $32 billion, and currently boasts a price-to-earnings (P/E) ratio of just under 15, which is considered fair value by most estimates. (For newbie investors: a P/E ratio represents the value of the company divided by its annual profits). With a share price of $182.00, and a projected dividend of $4.00, the stock pays a substantial 2.15% yield. If you owned the stock a year ago, you might be very happy with the recent increase, but at current price levels, many experts feel Intact is now overvalued compared to similar insurance companies and Canadian banks.
IA Financial Corporation (IAG.TO) is based out of Quebec and offers a wide variety of insurance products through its subsidiary, Industrial Alliance Insurance and Financial Services Inc. IAG is a smaller Canadian company with a market cap of $8.2 billion, and currently boasts an attractive P/E ratio of 10. The forward dividend yield of 3.29% makes it a solid revenue generator for income-based portfolios. And we’ve seen the stock recently recover from its COVID-19-induced fall in early 2020. While this stock may have potential, its volatility is substantially higher than others.
Finally, there are the Canadian bank stocks. Car insurance is a relatively small part of banks' bottom lines, but TD, RBC, and Scotiabank are household names in Canada that write auto insurance policies and hold a lot of market pricing power. National Bank gets an honourable mention as an excellent option to add to this list. With solid dividend yields, growing revenues, and long-term sustained growth firmly established, it’s fairly low risk to invest in these banking, insurance, and wealth management entities.
How to buy Canadian car insurance stocks
To purchase Canadian car insurance stocks, you first need to open a Canadian online broker account.
After researching what the right fit is for you with respect to trading and account fees, investor education tools, and customer service ratings, you need to provide your social insurance number, proof of residency (usually a rent or utility bill), and photo ID. Then you’re off to the races.
Most Canadian brokerages now offer online applications and can open accounts in a couple of business days (especially if it’s not RRSP season). Once you have your online broker account setup, you simply go to the trading screen, type in the “ticker symbol” (which is a three- or four-letter abbreviation, such as “IFC”) and then divide the amount of money you want to invest by how much a share costs. For example, if you want to invest $500, and shares are $48, you’d set the purchase to 10 shares, and then send your purchase order through.
Don’t panic if it all feels a bit new at first. Online brokerages have come a long way in terms of providing step-by-step guides and tutorials. It really isn’t as hard as it seems.
If the folks behind such brilliant investing moves as “Buy Gamestop and never sell no matter what” can make this thing work, surely we “Buy companies that make lots of money no matter what” types can figure it out, too.
Kyle Prevost is an educator at Million Dollar Journey, an online investing broker that’s been helping Canadians learn how to save money, build an investment portfolio, and become financially independent since 2006.
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