Insurance company question

[prunes]

I know that a lot of you here are pretty savvy when it comes to analyzing insurance companies. I don't know too much about the industry but am trying to learn. I was taking a look at 21st Century (TCHC), which is heavily weighted towards homeowners insurance in Florida and which trades at 0.39 of tangible book.

 

As of late the company has really struggled with a combined ratio in 2010, 2009, and 2008 of 135.7%, 135.1%, and 102.5% respectively. But if you go back to prior to 2008, the ratio was at or below 100%, excepting a catastrophic loss in 2004.

 

And, for example, if you look at the comments of people on the CAPS community of Motley Fool, expectations generally were very hopeful for the company up until 2008 at which point people stopped tracking it.

 

My question is, what happens to an insurance company that appears to be performing all right, but then falls off a cliff. TCHC currently trades at $2.78, but in 2007 it was above $25. Was there any way to predict this in 2007?

 

Is this simply due to rate regulations by the State of Florida, preventing companies from setting rates where they should be? Recently the company announced that it was approved for a 20% rate increase; is there any way to handicap when the company's prospects might improve?

[beerbaron]

Insurance is a tricky beast you sell a product before knowing what the price is...so companies with good combined ratio that suddenly drops because of an accident year were probably selling their product too cheap. As simple as that.

 

BeerBaron

[prunes]

How do you evaluate whether an insurer will be able to turn itself around? Would you say that even if an insurer is trading with a 60% margin of safety that that is insufficient if the company's underwriting has been poor?

[twacowfca]

I know that a lot of you here are pretty savvy when it comes to analyzing insurance companies. I don't know too much about the industry but am trying to learn. I was taking a look at 21st Century (TCHC), which is heavily weighted towards homeowners insurance in Florida and which trades at 0.39 of tangible book.

 

As of late the company has really struggled with a combined ratio in 2010, 2009, and 2008 of 135.7%, 135.1%, and 102.5% respectively. But if you go back to prior to 2008, the ratio was at or below 100%, excepting a catastrophic loss in 2004.

 

And, for example, if you look at the comments of people on the CAPS community of Motley Fool, expectations generally were very hopeful for the company up until 2008 at which point people stopped tracking it.

 

My question is, what happens to an insurance company that appears to be performing all right, but then falls off a cliff. TCHC currently trades at $2.78, but in 2007 it was above $25. Was there any way to predict this in 2007?

 

Is this simply due to rate regulations by the State of Florida, preventing companies from setting rates where they should be? Recently the company announced that it was approved for a 20% rate increase; is there any way to handicap when the company's prospects might improve?

 

Cat losses in FL have been very low in recent years.  It must have taken a lot of effort to put up CR's that high over not one but the last two years while writing homeowners policies in that low cat loss mileu.  Why was their CR so high?  A good homeowners insurer in FL should be able to have sub 100% CR's in low cat years while reinsuring most of their potential cat loss to prepare for the inevitable bad cats to come.  Seriously, something may be wrong beyond merely having a single bad year.  Perhaps, they don't reserve properly or insure a lot of vacant dwellings.  That's just a wild guess.  I haven't looked at their reports.  Do they have any dodgy assets on their books?  How long have they been in business?

 

It's possible there may be value there, but is there good reason to think there are only a few cockroaches?  Plus this is a microcap.  Is it worth it to dig deeper if someone else controls it?  Has there been a fundamental change in their business or management recently?  P/B means little if BV isn't solid.  Having approval for a big rate increase doesn't guarantee that their most responsible policyholders will renew their policies at the higher rate unless their competitors are planning big increases.  

 

Lots of questions . . . No answers.   ???