Questions For You All And Some Observations About Insurance Companies

I just stopped researching what is probably the tenth insurance company I have done at least cursory research on and I have come to a few conclusions after looking at insurance companies of all sizes.  I stopped research on this company because of its massive underwriting losses again.

  1. UNAM is the only company I have looked at that has had consistent consecutive underwriting profits for almost a decade now.
  2. The best companies besides UNAM have generally only had underwriting profits for 3 out of the past 10 years.
  3. Almost all of the other companies have had consistent underwriting losses over the past decade.
  4. Underwriting losses have generally gotten worse over the last few years.

Having noticed all of this I realized in my previous UNAM analysis write up that maybe I was making things too complex and wanted to ask your opinion on the matter.

  1. How truly difficult is generating consistent underwriting profits over the almost past decade during a soft insurance market which is what UNAM has done?
  2. Are the other insurance companies managements complete morons or are UNAM’s management and discipline just exceptional?
  3. Should the consistent underwriting profit override the low ROE and low investment returns at UNAM?

Also just out of curiosity, does anyone else find researching insurance companies and other financials tedious with the amount of lawyer talk and useless crap that fills the pages of the annuals and quarterlies just to make sure they do not get sued?

Looking forward to some discussion on this topic.

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8 thoughts on “Questions For You All And Some Observations About Insurance Companies

  1. Doesn’t UNAM provide Life insurance? That’s an long-tail business, you need to look at their entire history to see when they began writing claims and when they are expected to payout. If they wrote a lot of bad business in the last ten years, they might not be biting that bullet now, but in 40-50 years when the have to pay out claims.

    • @consolazio

      Thanks for you comments.

      In recent years around 98% of UNAM’s business has been writing commercial multi peril insurance. The remaining 2% is spread between various other things like life, health, etc. It looks like before 2004 they wrote more life and health insurance but it still was a very small portion of their policies written.

      You may be right that it is a small contributing factor to its very good results now though.

  2. You might like FBD Holdings (FBD:ID) underwriting record 🙂

    http://wexboy.wordpress.com/2012/11/28/fbd-holdings-cor-blimey-mate/

    I haven’t found a suitable study since, but I recall reading the industry operates (on average) on a permanent underwriting loss – something like a COR of 100-102%. The industry’s return has all come from net investment gains/income & leverage. Declining bond yields & declining equity return expectations shd obviously force a change – but big dumb bodies move v slowly, and can remain in semi-permanent denial (I’m reminded of corporate pension fund return assumptions here also).

    I think most insurance companies often embody the worst of corporate moronity. They suffer from:

    – The Institutional Imperative: If you create an insurance company & distribution network, and employ a few hundred/thousand people, and you don’t like industry underwriting pricing & assumptions – what are you going to do (insurance is a commodity business)? Stop writing business?! Nope, 9 out of 10 companies will plough ahead regardless – and almost year,/decade, it turns into a race to the bottom. Most companies will even try write more business in that kind of environment – maybe they’ll make it up on volume..!

    and

    – The Triumph of Hope Over Experience: Insurance is a forward-looking business. Despite reams & reams of data/history/statistics/studies, people in insurance companies (like most other companies) somehow almost always persuade themselves that this time ’round it will be different…

    • @Wexboy

      Thanks for the comments and links, also welcome to the site. Love your site by the way.

      Fantastic write up of FBD. That company looks very promising and leads me to a question which I will ask below. I also agree with pretty much everything you said about the overall insurance industry as well because thus far I have found pretty much the same things which is why I am so perplexed by UNAM’s exceptional results and apparent management discipline, especially since they appear to have proper reserves and surplus in the case of some kind of extraordinary insurance event. They are probably a bit too conservative in my estimate as can be seen at least in part in the low ROE but I would rather have them be on this extreme than the other.

      This leads to my question about buying shares in foreign listed companies. I use Firstrade as my broker as a US based investor, and have thus far had only one problem with them in that they charge a $75 fee to buy foreign listed stocks. Which broker do you use and what fees do they charge you for foreign listed shares because that seems ridiculously high to me and has so far turned me away from buying foreign listed shares that do not have US listed ADRs.

      • There is an article on SA about AFLAC and it’s underwriting profits. In the comments to the article, there was a discussion on how rare/common an underwriting profit is. Article is at http://seekingalpha.com/article/1032911-aflac-s-hidden-source-of-value
        I know that it does vary by type of insurance. Property & Casualty (P&C) almost never has an underwriting profit. Also, life insurance and reinsurance are long tail and you have to wait decades to truly determine the final outcome.

      • Thanks, Jason!

        Yeah, FBD never went crazy, but during the boom years they were seduced by the fallacy you can’t lose on property… That’s all been cleared out, so now they have a v conservative balance sheet (no debt) & portfolio. I like this (for the moment) – first, it means there will be no balance sheet shocks, and second it forces them to be even more disciplined in their underwriting – which, by all appearances, they are anyway. When you’ve the best COR in your market, it’s mostly about NOT making mistakes – do that & you’ll likely just keep grinding out market share from your competitors.

        In FBD’s case, there appears to be a US listing – worth investigating, but I’m generally dubious of those – considering their wider spreads, lower volumes & implied FX rates, I think most are a worse bargain than buying the local stock (even with higher charges). The key to a cheaper charge is to avoid calling the broker, i.e. trade online. Check out Fidelity & E-Trade (I suspect TD-Ameritrade might have a similar offering), I believe they now offer about a dozen markets or so at the click of a button, and they’re (almost) comparable to US online charges. They may even allow you to retain foreign currency proceeds in your a/c for future purchases. Pretty tasty. If you want to deal via a exempt/retirement a/c, research further – features offered (vs. regular a/cs) can be somewhat arbitrary – I really don’t know why.

        Unfortunately Ireland, as a small market, may not be offered (although TD does offer some service into Ireland, so that may filter up into their global/US platform?). But a lot of Irish stocks do trade in London also (in EUR, or sometimes GBP), so that’s an easier option to access (FBD trades in EUR under FBH:LN in London).

        If you have more detailed questions after researching, Nate at Oddball Stocks http://www.oddballstocks.com/ may be the real expert on cheap foreign stock charges – I’m sure he wouldn’t mind a question or two.

        Cheers,

        Wexboy

      • @Craig

        Thanks for the link and welcome to the site.

        P&C insurance companies almost never having an underwriting profit makes UNAM look even better than since 98% of its business is in that arena.

      • @Wexboy

        No problem, been creeping around your site for a while now since I found a link for it on Red’s site. Great stuff.

        I will also check into FBD some more as well. It seems from your analysis of them that insurance companies might be a good investment if it has a conservative balance sheet/investment portfolio, conservative and disciplined management, high ROE, and continued underwriting profits? If you don’t mind me asking what did you think of my UNAM analysis if you saw it, if you didn’t here it is: https://vijourney.wordpress.com/2013/01/22/unico-american-corporation-unam-a-company-i-would-love-to-own-outright/ Would really appreciate any further thoughts you might share.

        I will have to check around for prices and if I can’t find any information maybe I will contact Nate. I have seen that a lot of value bloggers say they deal with Fidelity quite a bit and that they have a pretty good selection of foreign/international stocks.

        Thanks again.

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