Best Insurance investment right now? MFC, RE, CNA or RNR

[prevalou]

-it seems main competitors are multiline insurers. Can you spot their combined ratio on the surety business?

- Is there a relationship between size of the surplus/premiums and risk ? Municipal bonds insurers for instance have big surplus compared to premiums, outstanding combined ratios but big risks.

-book value per share: 11% annually since 1997, (S&P 500 3%, BRKA 9%, WTM 12%, MKL 12%, WRB 14%) not bad but not outstanding.

[Guest HarryLong]

-it seems main competitors are multiline insurers. Can you spot their combined ratio on the surety business?

- Is there a relationship between size of the surplus/premiums and risk ? Municipal bonds insurers for instance have big surplus compared to premiums, outstanding combined ratios but big risks.

-book value per share: 11% annually since 1997, (S&P 500 3%, BRKA 9%, WTM 12%, MKL 12%, WRB 14%) not bad but not outstanding.

 

It's incredibly outstanding. Once you compensate for the over-reserving, it is clear the real economic profits and book value per share growth are much higher (and have accelerated, as you will see, as reserves have been released).

 

In addition, that BVPS growth is much safer than that coming from a competitor with sizeable equity exposure. It is really based on underwriting.

 

And if you will still argue that BVPS growth is not outstanding (which I do not accept), you will see that SUR has tremendous capacity, in my view, to increase premiums and/or do a return of capital. To compare their surety business to municipal bond insurers is, in my view, fatuous.

 

Everything else being equal, their low premium to surplus ratio, combined with their excellent underwriting performance, tells me that the business has the potential to earn even more.

 

Have you taken a look at the equity to assets ratio? It's amazing.

[prevalou]

I don't understand your point about compounded BVPS. Actually if they were over-reserved at the beginning of the calculating period, their real book value was bigger then and the compounded growth in BVPS is lower (except if you assume they are now over-reserved which is not a fact but a wish).  The equity to assets is not enough to conclude they are consevative. MBIA had a very good ratio before the financial crisis.

[Guest HarryLong]

I don't understand your point about compounded BVPS. Actually if they were over-reserved at the beginning of the calculating period, their real book value was bigger then and the compounded growth in BVPS is lower (except if you assume they are now over-reserved which is not a fact but a wish).  The equity to assets is not enough to conclude they are consevative. MBIA had a very good ratio before the financial crisis.

 

 

Except you're forgetting the other part--that means real economic profits were simultaneously understated. And remember, over-reserving can theoretically happen in perpetuity, or at least until a liquidation of an insurer, when it goes into run-off.

 

An assumption that they are over-reserved now is definitely not a wish--SUR has been over-reserving by approximated 14%, on average, for the last 10 years. (http://sec.gov/Archives/edgar/data/1044566/000095012310014518/c56212e10vk.htm). page 9

 

That's a fact, not an opinion. To give you some perspective on that number, can you name me ANY insurance company with a combined ratio which is as low, with over-reserving which equals, on average, approx. 14% a year for the last 10 years?

 

 

[prevalou]

real economic profits are included in BVPS except if you assume they are now over-reserved. (It is not a foregone conclusion even if they were over-reserved these 14 last years)

[Guest HarryLong]

real economic profits are included in BVPS except if you assume they are now over-reserved. (It is not a foregone conclusion even if they were over-reserved these 14 last years)

 

Again, can you name me ANY insurance company with a combined ratio which is as low, with over-reserving which equals, on average, approx. 14% a year for the last 10 years?

 

In life, we are forced to look at the past in order to draw conclusions about the future. If an insurance firm has a history of bad reserving, it means they have a history of making optimistic estimates about future liabilities.

 

Similarly, a company which has a history of dramatic over-reserving has a history of making pessimistic, or quite conservative estimates of future liabilities.

 

Nothing in life is a foregone conclusion--however, the numbers (even for the very latest year of reserve development) are screaming that over-reserving is continuing. And dramatic over-reserving at that.

 

We are in a game of probabilities. The probabilities dramatically favor the proposition that over-reserving is occurring. Would you invest with, or against, such an outstanding record of performance and stewardship? --especially when such a record can be obtained at a discount to tangible book value.

 

[Myth465]

I am going to have to agree with Harry, this seems like the best deal in the space. Plus one doesnt have to worry about hurricane risks. I plan to look into it a bit more over the weekend, but thanks for the link, and the lesson. Do you know what caused the losses from a reserve perspective in 2001 and 2002?

[prevalou]

I can't give you figures on competitors because they are mainly multiline insurers . It would be comparing apples to carrots. Bill Miller, if I remember well had a very strong track record (13 ou 14 years of consecutive market over-performance), before his fund had big under-performance. So probability has to be put into context. The question is business stability. Can for instance a black swan happen in this industry ? Concerning systematic over-reserving I am not sure it is a good thing. You have to reserve well, not too much or to little. Is this to pay less taxes ?

[prevalou]

two questions about the surety industry and SUR: 1) are not their insurance risks correlated : it is mainly a construction industry insurance (65%) ? 2) the premiums are very low in proportion with the amount insured. So it is supposed to be a no loss industry (like munis). Fine when the context is benign like in recent years. What happens if suddenly losses escalate. Are there then enough reserves? See year 2001 for instance: suddenly cumulative deficiency reserves /2000 strong cumulative redundancy reserves.

[vinod1]

Thanks for sharing your research. SUR looks like a very promising find. I took a look at a couple of their annual reports and as with evaluating any P&C company that passes the more mathematical filters so I am trying to assess the following qualitative factors (which prevalou has already pointed out):

 

1. They had an average combined ratio of 87% over the last 10 years. The question I would ask is what is the reason for this performance? What compititive advantage did they have that allows them to keep the combined ratio this low? Did the specific line of business itself have such low combined ratio overall across companies in this industry? 

 

It could not be just because they have discipline or have smart underwriters. Do they have lower costs than the compitition and if so how did they achieve it? Do they have some relationships/networking advantage? Do they have financial strength/ratings significantly better than compititors?

 

I have not seen anything (so far) that leads me to believe they really have any compititve advantage that would generate lower CR than the compitition other than via discipline, which they do seem to have.

 

So this leads me to believe that the surety line of business might be generating low CR across the board for all companies in the industry or at least those companies that do it right with enough discipline.

 

I am not able to find a comparable mono-line writer focussing on surety that would allow a true comparision to peers.

 

2. What does the tail risk looks like? In this business the losses seem to come from just a few occurances as they generally do not expect to payout much i.e. very low premium relative to payout. So you need a really long time (say 25-30 years) to even begin to get a general idea of the true costs. They had a high CR of 119 once already in 2003 and not sure of the probable frequency of this due to having less than 15 years of data. Also if economic/credit conditions are going to be unfavorable going forward, how would this reflect into the CR?

 

3. What are the growth opportunities? This line of business seems to have relatively rational participants with stable pricing so no possibility of really hard markets that would increase the premiums and profits is ruled out. So is the current situation is about the best that could likely be expected in terms of profits?

 

I think this looks like a very promising find and going to dig deeper and just wanted to pick your brain to see if you have any thoughts that you can share. 

 

Thanks

 

Vinod

[Packer16]

One small comp you can look at is ACMAT (although they also have a construction component).  In good times, it appears as if the loss ratios are in the high teens to twenties and when a bad patch is hit the loss ratios increase to to the high twenties to the low 50s) for both firms.  A majority of premiums are from insuring construction and other large projects.  It appears that the last bead patch was during the last recession 2001 to 2005.  So going forward some positives is large amount of infrastructure projects planned with the stimulus and all.  Both firms loss ratios have held up through 2009. 

 

One risk I am having a hard time gauging is the take-down risk.  I have had 3 takedowns in the past 6 months which have lowered my investment upside considerably.  Given CNA owns 70%, does anyone have a feeling for the probability of a take-down for less than book and can CNA force this?  Also the next largest shareholder is DFA (an efficient markets fund - which doesn't give me a good feeling about the defense if a take-down is initiated by CNA).

 

Packer

[Guest HarryLong]

Ahh, yes, whereas before I was derided for insisting upon proper research, now you are all grateful for my munificence is sharing knowledge  ;D Lol!

 

How the tides of public opinion turn when you just give the masses something which they don't have to work for. Just kidding guys, but you all crack me up.

 

I think I will go to my Zen cave (ahem, office) and meditate upon the 99.99% of my ideas I haven't shared yet.

 

[prevalou]

good idea!!! just kidding

[Guest HarryLong]

I can't give you figures on competitors because they are mainly multiline insurers . It would be comparing apples to carrots. Bill Miller, if I remember well had a very strong track record (13 ou 14 years of consecutive market over-performance), before his fund had big under-performance. So probability has to be put into context. The question is business stability. Can for instance a black swan happen in this industry ? Concerning systematic over-reserving I am not sure it is a good thing. You have to reserve well, not too much or to little. Is this to pay less taxes ?

 

Ahh, taxes, very clever Prevalou. Very clever.  ;)

 

I'm glad you all take my comments in the good fun with which they are intended.

[Guest HarryLong]

Thanks for sharing your research. SUR looks like a very promising find. I took a look at a couple of their annual reports and as with evaluating any P&C company that passes the more mathematical filters so I am trying to assess the following qualitative factors (which prevalou has already pointed out):

 

1. They had an average combined ratio of 87% over the last 10 years. The question I would ask is what is the reason for this performance? What compititive advantage did they have that allows them to keep the combined ratio this low? Did the specific line of business itself have such low combined ratio overall across companies in this industry? 

 

It could not be just because they have discipline or have smart underwriters. Do they have lower costs than the compitition and if so how did they achieve it? Do they have some relationships/networking advantage? Do they have financial strength/ratings significantly better than compititors?

 

I have not seen anything (so far) that leads me to believe they really have any compititve advantage that would generate lower CR than the compitition other than via discipline, which they do seem to have.

 

So this leads me to believe that the surety line of business might be generating low CR across the board for all companies in the industry or at least those companies that do it right with enough discipline.

 

I am not able to find a comparable mono-line writer focussing on surety that would allow a true comparision to peers.

 

2. What does the tail risk looks like? In this business the losses seem to come from just a few occurances as they generally do not expect to payout much i.e. very low premium relative to payout. So you need a really long time (say 25-30 years) to even begin to get a general idea of the true costs. They had a high CR of 119 once already in 2003 and not sure of the probable frequency of this due to having less than 15 years of data. Also if economic/credit conditions are going to be unfavorable going forward, how would this reflect into the CR?

 

3. What are the growth opportunities? This line of business seems to have relatively rational participants with stable pricing so no possibility of really hard markets that would increase the premiums and profits is ruled out. So is the current situation is about the best that could likely be expected in terms of profits?

 

I think this looks like a very promising find and going to dig deeper and just wanted to pick your brain to see if you have any thoughts that you can share.   

 

Thanks

 

Vinod

 

In insurance, discipline is about the best competitive advantage you can get. That's the name of the game.

 

As for Black Swans, there's no need to put all your eggs in one basket. Risk can only be responded to, or managed, never accurately predicted.

 

Most risks, such as nuclear war, etc, are so devastating and real that we don't ever think about them, whereas simple things like diversification, which can be easily achieved, are often ignored, since they are so easily attained.

 

The intellectually honest answer in insurance, is that, as Buffett points out, all surprises are nasty surprises. The BP disaster proves that. I have never heard of one person who predicted that type of a risk/outcome before the fact (although maybe someone did, I just haven't hear about it). As I say, risks can't be predicted, only managed.

[Guest HarryLong]

I am going to have to agree with Harry, this seems like the best deal in the space. Plus one doesnt have to worry about hurricane risks. I plan to look into it a bit more over the weekend, but thanks for the link, and the lesson. Do you know what caused the losses from a reserve perspective in 2001 and 2002?

 

Myth, I wouldn't leave you hanging out to dry. I may seem harsh, but there is always a goal in mind. Thank you for the compliment.

[Guest HarryLong]

Thanks for sharing your research. SUR looks like a very promising find. I took a look at a couple of their annual reports and as with evaluating any P&C company that passes the more mathematical filters so I am trying to assess the following qualitative factors (which prevalou has already pointed out):

 

1. They had an average combined ratio of 87% over the last 10 years. The question I would ask is what is the reason for this performance? What compititive advantage did they have that allows them to keep the combined ratio this low? Did the specific line of business itself have such low combined ratio overall across companies in this industry? 

 

It could not be just because they have discipline or have smart underwriters. Do they have lower costs than the compitition and if so how did they achieve it? Do they have some relationships/networking advantage? Do they have financial strength/ratings significantly better than compititors?

 

I have not seen anything (so far) that leads me to believe they really have any compititve advantage that would generate lower CR than the compitition other than via discipline, which they do seem to have.

 

So this leads me to believe that the surety line of business might be generating low CR across the board for all companies in the industry or at least those companies that do it right with enough discipline.

 

I am not able to find a comparable mono-line writer focussing on surety that would allow a true comparision to peers.

 

2. What does the tail risk looks like? In this business the losses seem to come from just a few occurances as they generally do not expect to payout much i.e. very low premium relative to payout. So you need a really long time (say 25-30 years) to even begin to get a general idea of the true costs. They had a high CR of 119 once already in 2003 and not sure of the probable frequency of this due to having less than 15 years of data. Also if economic/credit conditions are going to be unfavorable going forward, how would this reflect into the CR?

 

3. What are the growth opportunities? This line of business seems to have relatively rational participants with stable pricing so no possibility of really hard markets that would increase the premiums and profits is ruled out. So is the current situation is about the best that could likely be expected in terms of profits?

 

I think this looks like a very promising find and going to dig deeper and just wanted to pick your brain to see if you have any thoughts that you can share.   

 

Thanks

 

Vinod

 

Your questions about SUR comparables are prescient. I would encourage anyone who has followed this thread to do some primary research by speaking to insurance executives with a knowledge of the surety landscape. I've done this myself. From what I hear, SUR is highly respected, but I would be very interested in hearing anyone who has heard otherwise.

 

Also, I would encourage anyone who has been following this thread to look into NATL and RLI, rather than putting them aside. They have fascinating underwriting results in lines which, overall, are quite different from SUR's.

 

Pretty cool that we found a CNA Financial publicly traded subsidiary with amazing results, eh?

[Guest HarryLong]

One small comp you can look at is ACMAT (although they also have a construction component).  In good times, it appears as if the loss ratios are in the high teens to twenties and when a bad patch is hit the loss ratios increase to to the high twenties to the low 50s) for both firms.  A majority of premiums are from insuring construction and other large projects.  It appears that the last bead patch was during the last recession 2001 to 2005.  So going forward some positives is large amount of infrastructure projects planned with the stimulus and all.  Both firms loss ratios have held up through 2009. 

 

One risk I am having a hard time gauging is the take-down risk.  I have had 3 takedowns in the past 6 months which have lowered my investment upside considerably.  Given CNA owns 70%, does anyone have a feeling for the probability of a take-down for less than book and can CNA force this?  Also the next largest shareholder is DFA (an efficient markets fund - which doesn't give me a good feeling about the defense if a take-down is initiated by CNA).

 

Packer

 

Good find on Acmat. I spent a lot of time on that years ago. No one else has ever mentioned it to me before. Who knew there was a player in the industry who actually made money insuring asbestos risks? I would love to do a study of the results of formerly captive insurers.

[twacowfca]

I am going to have to agree with Harry, this seems like the best deal in the space. Plus one doesnt have to worry about hurricane risks. I plan to look into it a bit more over the weekend, but thanks for the link, and the lesson. Do you know what caused the losses from a reserve perspective in 2001 and 2002?

 

Myth, I wouldn't leave you hanging out to dry. I may seem harsh, but there is always a goal in mind. Thank you for the compliment.

 

 

Many thanks for sharing your good idea.  Also. kudos for your provocative way of getting board members to pay attention to your idea.  :)

[prevalou]

one of the dangers with a specialized insurer (even if its past seems to be brillant), is that  multiline insurers can underprice in this speciality for years, without being bothered if they earn money elsewhere.So Sur could have a competitive dis-advantage versus multiline competitors.

[Guest HarryLong]

one of the dangers with a specialized insurer (even if its past seems to be brillant), is that  multiline insurers can underprice in this speciality for years, without being bothered if they earn money elsewhere.So Sur could have a competitive dis-advantage versus multiline competitors.

 

I think we're getting a little far afield. If that occurred, the first place you'd see it is in the quarterly numbers, and the quarterly numbers are great.

[prevalou]

in some insurance market (long tail and correlated risks), numbers can look great until they are catastrophic (like in the financial markets). In the cds market for instance, before the financial crisis, it was not clear people were underpricing because there was no loss.

[Packer16]

I think if you look at Acmat (the only other surety firm out there) you will see the loss numbers are consistent with CNA.  The expense ratio is higher due to a small insured base.

 

Packer

[prevalou]

surety bonds have to be analysed  like credit (objective no loss) and not like traditionnal insurance. They can be subject to black swans (like a big recession or hyperinflation) especially due to the fact they are concentrated in the construction industry.Once more, "only when the tide goes out do you discover who's been swimming naked." An historical perspective shows there were periods of combined losses for the industry (due to inflation after the oil embargo for instance, in 1992 due to recession or in 1985 due to irrationality of the actors). We habe been in a benign period with rational players for 7 years. How long will it last?

[Myth465]

Isnt every Insurance Business / Every Business in General exposed to black swans?