1. Stick with conservative managements. You make money in insurance by not losing it. Conservative underwriting and reserving allow managements to make economically rational decisions, rather than fruitless market share wars, or giving into sell side analysts with a fixation on top-line growth.
2. Focus on companies with sustainable competitive advantages. Insurance is a competitive business; companies that do not have an edge against their competition will likely earn subpar returns.
3. Consider companies that can (and do) earn a high ROE over a full underwriting cycle. Anyone can earn money when the market is hard, but who protects your investment when the market for insurance is soft? Intelligent insurance managements adjust their competitive posture to the market environment.
4. Finally, buy them cheap, and sell them dear. Within the above three principles, focus on companies that are out of favor, and sell companies when their prices outstrip their fundamentals. This last principle is the most obvious, which is why it operates inside the contours of the first three principles.
Bringing it to the Present
I still think these four principles are valid. They aren’t flashy, and they take some thought, but they focus the analysis in an industry that is difficult to understand.
I try to focus on companies that are good operators; they manage their base of insurance businesses well, rather than those that are clever investors, because the ability to be clever investors over the long run is much harder than being a well-run insurer.
With that, I bring my “Flavors of Insurance” series to an end. I hope you enjoyed it. I always wanted to publish it, and if I hadn’t tripped across a very bad copy of it, and had my son Timothy correct the OCR version, this never would have seen the light of day. So what I wrote 6-7 years ago can benefit a wide audience. And remember, aside from the “Bringing it to the Present” parts, the original was written in one excruciating, draining day– a labor of love that was frustrated, but now realized.