Investing in Insurance Companies: A Look at Management

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Investing in Insurance Companies: A Look at Management

The Squishy Stuff

I think I have just one more post left after this one, and this series ends.  This post deals with qualitative factors, which are harder to ascertain than the quantitative factors, and require more experience in order to learn.  But maybe I can aid my readers with a few pointers so they can learn faster.

Before we go, this series published at The Street.com University is an excellent start for any analyst, and includes many insurance examples.  But now for the rest.

Mohnish Pabrai’s Lessons From Buffett, Munger And Life

Mohnish PabraiEarlier this month, value investor Mohnish Pabrai took part in a Q&A session with William & Mary College students. Q3 2021 hedge fund letters, conferences and more Throughout the discussion, the hedge fund manager covered a range of topics, talking about his thoughts on valuation models, the key lessons every investor should know, and how Read More

Some products cannot be underwritten.  Anytime the insured knows more than the company, that is not a policy to write.  As an example, I toss out Long-term care policies, where the insurance industry has lost and lost again.  The insureds know their likely claims far better than the insurers do.  I feel the same about credit and mortgage insurance, where losses are so correlated that in a real crisis the insurance company fails, and those relying on the insurance fail as well.

I feel the same way about variable annuity living benefits at present — a rising market sets up the losses for when the market falls.

Avoid investing in companies where the law of large numbers does not apply.  This is true of all financial coverages.  If there is one big macro factor that drives your business it is not a safe place to be.

On Management

Management teams should be reliable.  They should always give complete and consistent answers to all questions, and demonstrate that they are managing the business, with underwriting being profitable.  They also should be willing to let results fall short of analysts’ estimates when it is true.

Though the short-term stock performance will be bad, the honesty will support the stock nearer to book value.  Investors appreciate honest companies, even when they do badly.

Finally if management has any sustainable competitive advantages (rare in insurance) they will use the advantages, and describe them in general terms so hat other insurers don’t reverse engineer them.

Be sure and read my series listed above.  It offers far more than what I have written here.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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