insurance company balance sheet

[finetrader]

On other discussion tread, people have made reference to the Davis Dinasty. I haven't read this book yet, but plan to do it soon.

 

From what I've understand, they bought insurance companies selling at below tangible book value.

So I've screen a few insurance companies, and I've noticed that an item on the asset side come quite regularly. it is the Deferred acquisition costs.

 

I am wondering what this item is all about and if you would consider it to be a tangible or intangible asset? anyone could enlightened on this?  I'm assuming that it is intangible since it is money spend on acquiring new business that COULD pay off in the future.

 

Thanks in advance

[twacowfca]

On other discussion tread, people have made reference to the Davis Dinasty. I haven't read this book yet, but plan to do it soon.

 

From what I've understand, they bought insurance companies selling at below tangible book value.

So I've screen a few insurance companies, and I've noticed that an item on the asset side come quite regularly. it is the Deferred acquisition costs.

 

I am wondering what this item is all about and if you would consider it to be a tangible or intangible asset? anyone could enlightened on this?  I'm assuming that it is intangible since it is money spend on acquiring new business that COULD pay off in the future.

 

Thanks in advance

 

The idea of deferring acquisition costs is the norm.  It's reasonable and appropriate in theory, but sometimes problematical in practice because low quality insurers may use DAC to hide problems.  The basic idea in the most simple form is to use DAC to defer the up front payment of a commission made to an agent who sold the policy over a period of time as the regular payments made by the policyholder are made.  However, problems may arise, for example, if the policy was sold to an unqualified buyer.

[woodstove]

"The Davis Dynasty" book is an ok read, but not some secret to success.  Father Selby, as I recollect, was the one who focused on insurance companies; son (also Selby) was more diverse, maybe not as successful, just started with more capital.  But I perhaps mis-remember.  The father had worked in the NY State insurance oversight agency, I believe, so knew the industry players pretty well; it might be hard for someone without similar industry experience to match his stock-picking performance.

 

You have it right, from the little I know, about the nature of deferred policy acquisition costs -- monies spent, to acquire policies still in force (coverage for periods beyond the balance sheet date).  Those are intangible as assets, but very real cash expenditures.  I wouldn't consider there to be any doubt, however -- the cash has likely been paid out, and the compensating premium cash has also likely been mostly received; the open question is the quality of the future policy obligations.

[Guest HarryLong]

It's really very simple. He discovered a high quality insurer. It was called Progressive (PGR)  ;D

 

Happy hunting.  :D

[finetrader]

Thanks for the input guys,

 

at first i didn't realized the 'mirror image' relationship that exist between the DAC on the asset side and the unearned premium on the liability side.

 

So i guess in the future If i am going to count the unearned premium as a liability, i will count DAC as a tangible asset. And maybe discount it(but not completely) when looking at a poor insurer.

 

I think I found one potent company that would qualified with respect to buying way below tangible.. I'll tell you later about it..  :-X