what were their loss ratios?
I’ll play: list these under 60% loss ratio companies you are shilling
i don’t wanna play. U can play by yourself if u want
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Tell your Mom I said hi
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Consistent sub-40% LRs exist even outside of niche LOBs. But it’s often paired with very high expenses.
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Indeed. But that’s a very different statement than saying pick companies with loss ratios consistently in their 60’s.
At least within P&C insurance…looking just at loss ratios as a measure of underwriting performance is for suckers. Combined ratio is the better metric (although it does have its shortcomings too).
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I’d also expect a company with consistently excellent loss ratios (and more importantly combined ratios) would likely have very high valuation relative to book value so wouldn’t necessarily be a better bet than simple passive diversified investing. Though I’d also agree it wouldn’t likely make you poor.
Pretty much the time to buy an insurance company (specifically p&c) from an active perspective is likely immediately after a catastrophic event. You find the well-capitalized insurer, or insurer with relatively little exposure to said catastrophic event. And there’s a chance it is trading below fair-value as other investors may not understand the distinction and assign a discount to all insurance companies while there is fear and panic in the markets.
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What about small cap or startups? I.e. yesterday I was looking at Root’s 10-Q reports. They seem to be several years away from profitability. Their stock is down 75% from IPO with a market cap around 1.5B. Their premium growth is essential to stay afloat, and they’ve got hitting hard due to the pandemic.
I think this is a really key point. You could do fantastic investment analysis and will likely come to the conclusion that most firms are fairly valued relative to their current price (and if you don’t it more likely suggests something off about your assumptions). You not only have to do great investment analysis but you also have to effectively stumble on one that is currently mispriced.
I think it depends on the niche of the startup.
Some of the niche insure-tech-y personal lines startups could be interesting due to the likelihood of their eventually being acquisition targets. Beyond that, I’d be skeptical about investing in a US personal lines focused startup, due to just how competitive PL is in the States, and what that competition implies about prospects for profit for the smaller players.
Perhaps if you found a startup where the market valuation has taken an excessive beating recently…
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Or more specifically, profit loads based on RAROC for risky lines (long duration, low freq/high sev).
One bad year can blow through a decade of single digit LRs.
Yep. Excess cat is a great example of this. A carrier with heavy CA Earthquake exposure may have benefitted from a zero loss ratio in recent years, but tread carefully in terms of investment potential here.
They remind me of someone’s comment about all these new companies that are supposedly going to come in and disrupt the insurance market. They’re all tiny, they lack economies of scale, they’ve got limits to how fast they can realistically grow without running into regulatory issues. Most of them are looking to be acquired by someone else so that the initial investors can get rich, the rest are likely to get to a certain size and stall out and have to figure out what to do.
Unless they’ve truly figured out something no one else has and they can keep that secret long enough to exploit it at everyone else’s expense, they’re basically doing what others are trying to do - except others have more money to pour into it while also generating profits elsewhere.
The only insurance innovation worth investing in was Progressive when they started rating based on credit score
I haven’t heard of any real breakthroughs
The only insurance company I would consider investing in right now is maybe Berkshite Hathaway
freudian slip?
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I think the insurance industry is ripe for innovation And startups. Theres a huge disconnect between what consumers want and what insurers provide.
Startups are testing the waters. Not all will crack the nut, but some are going to. And with scaling via internet, the right implementation can become a player pretty quickly. Conversely, scaling isn’t a word used by any insurer ever.
My background is P&C. For that sector, I completely agree with your first paragraph. I am not sure it necessarily leads to the second. Given the huge advantage to incumbents in terms of data, I imagine the technological leap may come from a current player with some new innovations.