Criteria #3:Underwriting discipline
It’s always easy to write foolish insurance policies and sacrifice your underwriting discipline for quick gains now. Of course, these quick gains will turn into severe pain later down the road when customers will claim to be compensated by their insurance company. Maintaining a smart and balanced approach is the core fundamental of any successful insurance company
Who’s great and who isn’t?
The Travelers Companies Inc (NYSE:TRV) and W.R Berkley couldn’t be more different. Whereas Travelers Companies Inc (NYSE:TRV) is a $32 billion company, trading at a P/E of 13.5x with a 2.2% div. yield, W.R Berkley is “only” a $6.5 billion company trading at a cheaper P/E of 12x with a div. yield of only 0.8%.. But these valuation metrics don’t matter so much when it comes to insurance. The common thread here is that both are excellent examples of how insurance companies should be run. The former has managed to grow its float and its investments by about 90% in the past 10 years. The later increased its float by “only” 50% in the same time period, but it more than compensated for it with a 180% growth in the value of its investments. That’s quite a remarkable figure. Both companies have consistently shown underwriting profitability. In other words, their profits exceeded what they had to pay for claims.
On the other side of the equation we have the notoriously famous American International Group Inc (NYSE:AIG). In a striking contrast to the examples above, American International Group Inc (NYSE:AIG) has managed to decrease its float by 20% over the past 10 years and lose 80% of its portfolio of investments. In addition, all of its underwriting profit was consumed by claims. Nothing was left.
The Foolish thinks insurance
Insurance companies should be your core holding. Insurance companies never have to borrow a dime, they keep all the investing profits to themselves and they grow their book value over the years. Don’t miss out on this undiscovered opportunity.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and W.R. Berkley Corporation (NYSE:WRB) and has the following options:Long Jan 2014 $25 Calls on American International Group.