The book The Five Rules for Successful Stock Investing from Dorsey (see my review here) mentiones the following characteristics as hallmarks of P&C insurers and I wanted to check in on ‘my’ three insurances …
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The book The Five Rules for Successful Stock Investing from Dorsey (see my review here) mentiones the following characteristics as hallmarks of P&C insurers and I wanted to check in on ‘my’ three insurances.
- low cost leader: since the customer decision on which insurance to buy is predominantly driven by price — a commoditized market — good insurers should be able to offer low prices.
- strategic acquirer: it might be worthwhile to increase business by buying insurers that are not particularly well managed on lower price points (relative to some measure, like premiums), and improve operations.
- specialty insurer: niche markets can be shielded from the worst competition and might offer more profitable business opportunities.
- rational management team: like in other financial industries, increasing business volume is not particularly difficult, but to grow profitable is another story, requiring good management that know that profits of todays written business is uncertain to at least a certain extend. Further, the industry has cycles and there are strategic decisions involved (ie, higher capitalization levels might offer the chance for more opportunistic business in the future).
- not reaching for yield during low interest environments. Big oppotunies can presnt themselves during a period of rising rates if competitors suffer losses on long-duration bond portfolios, limiting thier underwriting capacity (added from other source)
PGR is a low cost leader (together with Geico. But with better lt. perspectives?) and did ‘strategic acquisitions’. It is not a specialty insurer but is especially good at segmentation in the mass market of car insurance. The management can be described as rational, or, at least they lead the industry with rate increases and follow strictly on their strategy (and promise) of growing as fast as possible with CR<96%. Further, Tricia, the CEO, holds >600k shares worth >$60m, constantly rising since two decades. The CIO, Bauer, only holds 13.7k shares and Broz (C-information-O) holds 42k shares.
* The acquisition within the property insurance segment is not truly working out so far and PGR recently took an honest impairment charge, though it should have lengthened the life expectancy of bundled car policies. The recent acquisition in the commercial segment seems to be right on spot: the target was unprofitable before and now is within PGR’s currently most profitable segment which shall deliver good growth going forward).
PROT is also a low cost leader through its own IT systems and focus on the broker distribution model (focus on quality, feedback). It is not active as ‘strategic buyer’ so far, since it is a young company expanding on its own and above market rates. PROT is active in a niche but far from alone. Management is rational and willing to generate more lumpy returns in both its underwriting business as well on the investment side. Hoye recently became CEO and now has 222k shares, up 10x from merely 20k before. This is a nice alignment, incentive. The history if Didring (deputy CEO) looks similar, as does the CFO’s.
Qualitas shareholders are somewhat unknown (not up-to-date) but managers should act in the interest of and in alignment with the two big family shareholders. Qualitas’ scale provides some cost and operating efficiency benefits, ie IT development. Qualitas acquires small foreign insurance operations for international expansion and uses it business model as a blueprint. It is a mass market insurer per se, but it is mostly successful in trucks with a market share close to 50%.
I recognize for each of my three insurance investments 3/4 features. I tend to recognize Protector as the best scorer here, since it has the best reason not to score four points: acquiring other companies makes little sense while growing strongly and using its culture as an advantage in new markets.
 I still have a tiny position in Talanx, which I intend to sell.