P&C Insurance: Competence In The Boring Stuff by S&C Messina
P&C insurance is within our circle of competence from a knowledge and investing standpoint. From our experience starting and running an online insurance agency and our years of studying the insurance industry, we have been able to develop our familiarity with this niche. This niche of competence is one of the reasons we started a fund dedicated to investing in the sector. Buffett stated earlier this year in an interview on CNBC (2:40), “But I don’t understand every aspect of insurance, I understand some of the key economic characteristics of insurance and the same way with the railroad. I know a lot of things about parts of the railroad that lead to an economic conclusion. But, there are a lot of things I don’t understand, I mean, and that’s true of industry after industry.” The same goes for us with insurance – we know enough to understand the business model and primary economic drivers. And we keep learning.
Another reason why we find the insurance space interesting is that’s it’s under-followed by most people and investors because it’s dull and small in relative market cap to the entire stock market.
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The P&C insurance space is under-followed by most people and investors because it’s boring and evokes images of bad things happening. Most would rather watch paint dry. This is a blessing for us because where most do not look, we see opportunity to use our knowledge and skill set to navigate the landscape.
Investor Peter Lynch also looked for boring/repelling characteristics when investing in companies. Four of the thirteen characteristics are as follows:
- Sounds dull or ridiculous
- Does something dull
- Does something disagreeable
- Depressing about it
Source: Lynch, Peter (2012-02-28). One Up On Wall Street: How To Use What You Already Know To Make Money In the Market (Kindle Location 1943). Simon & Schuster. Kindle Edition.
It’s under-followed because for investors, ETFs and mutual funds trying to track the major benchmarks and broader stock market indices, publicly traded P&C insurers only comprise a tiny portion in terms of total market capitalization, especially without AIG and Berkshire Hathaway. In other words, as a publicly traded sector, it doesn’t move the needle much, so there’s no point in spending time calibrating one’s portfolio’s exposure to the insurance industry. Why look at and sift through a bunch of companies that have a total combined market cap less than the individual market caps of companies like like Apple, Wal-Mart, etc. The illustration (from 2012) below clearly shows this:
Source: Dowling & Partners. Presentation: “CAN/WILL THE “HARDENING” P&C MARKET CONTINUE ABSENT A CAPITAL EVENT?” pg. 5.