When consumers purchase insurance for cars and homes (or rental homes), the concept is relatively easy to understand. From an investment standpoint, there are many positive attributes of the property-casualty business model:
Regulators and rating agencies appreciate these attributes and assign relatively lighter capital requirements to personal lines businesses. This segment of property-casualty insurance is perhaps the most commoditized; differentiation amongst companies derives from distribution, cost advantages, and brand, amongst other attributes.
Our team likes this sector; we like the reliability of loss estimates and find it easier to trust the carried reserves on the balance sheet (the largest liability on any insurance company’s balance sheet), particularly given our internal reserve analysis which you can read more on this separate research piece.
The companies in this sector also tend to purchase much reinsurance to limit “tail risk” (i.e. aggregation of losses from natural disasters such as earthquakes and hurricanes), which again, instills trust in the balance sheet. These companies can write business with greater leverage (premiums/capital), so every point of underwriting margin generates relatively greater return on capital. Some of our longest-term investments are insurance companies with significant personal lines operations.
Everyone uses insurance, but few people realize how attractive these companies can be from an investment standpoint. The piece you just read is an excerpt from a white paper entitled The Nuances of Insurance Investing. To read the full piece, please visit the link below.