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Insurance Investment Strategies: Part II - Alternate Sources For High Yield

Published Wed, 10 Apr 2019 08:24:27 -0400 on Seeking Alpha

As explained in my first article, insurers are generally considered recession-proof. Thanks to strong leading positions in niche markets, some of them are able to generate recurring and resilient cash flows which are redistributed over the years to the shareholders. DGI Investors might find many insurance stocks, which could fit with their investment philosophy (well-covered dividend, low payout, predictable cash flows due to a leading position or strong competitive advantages).
Nonetheless, these companies' stocks remain usually expensive, as investors value their resilience and undeniable strengths. Hence, the dividend yield used to be low (about 2%). Retirees or income investors might be interested in higher yield alternatives. Luckily for them, they could find what they want with preferred stocks and bonds issued by insurers. These alternate sources usually generate more than 5% per year.
But first; why do insurers issue preferred stocks and bonds?
To meet regulatory requirements set up by the NAIC (National Association of Insurance Commissioners), insurance companies are obliged to maintain a certain level of available capital. To help meet these NAIC’s requisites, some insurers have issued baby bonds or preferred shares, which are eligible to be considered as Tier 2 capital. When the preferred is non-cumulative perpetual preferred, it is also eligible to be considered Tier 1 capital. This is why most insurance companies today favor this second type of capital,... Read more