Hey, thanks for this summary. Do you have some good resources how to analyze insurance and similar companies? I see revenue is falling here for many years, at the same time net income is rising nicely. What metrics, methods do you use to analyze it and if it is at fair value or lower/higher (again, would love to learn it myself..)
That's actually quite an interesting (and complicated) subject that really should be a post of its own, since there's a lot to talk about! I'll see if i add it to the list!
In general though, insurance is quite a simple business to understand if you have any background in statistics, so to me (especially since I do have that background and I work in the area) it's easy to look at their annual report and see what red flags I should look for.
Insurance has 3 key aspects that anyone evaluating the business should look for, those are:
Investible Assets
Insurance Liabilities
New and Ongoing Business
If you get a clear idea of what a given company has for each of them then it becomes fairly easy to judge if the business is doing poorly, or if it's doing well.
So what (and how) do you look for these things?
When it comes to investible assets it's actually quite simple, all US insurers are required to file a breakdown of their investment assets in their 10-K, so all you have to do is read through them and see what sort of assets those are, what sort of return they're providing, and how safe are they. For Aflac over half of their investible assets are in Japanese treasuries, so their risk is almost zero, their corresponding return is quite small as well but not concerningly so. The rest of their assets are generally considered investment grade, hence the risk is also quite small, so Aflac has no red flags there. On the other hand a company like Genworth (see https://tiagodias.substack.com/p/quick-look-genworth-financial?s=w) has most of their assets in non-investment grade bonds, so the risk profile there is significantly higher.
You can also do the same sort of process for their insurance liabilities. This is quite a bit harder, so it helps to read the reports multiple times, as well as understand exactly what liabilities the company has taken on. Health insurers have significantly different risk and cost profiles than car insurers or mortgage insurers, and so on. This sort of thing is where most insurers fail, when they fail to account for certain costs/risks, or account for them improperly, hence it's important to stay away from highly correlated insurers (ie if your company sells earthquake insurance in only california you're going to have a hard time once the earthquake comes!) as well as those insurers who give clients too good of a deal (many of the new "high tech" insurers are vastly underestimating the costs of the insurance policies they are selling, and are effectively losing money on most policies they sell!).
Whenever an insurer says something to the extent of "we're much better at judging the risk than our competitors and that's why we give better rates" that's a massive red flag telling you to stay away!
Finally there's the new and ongoing business. Are the premiums coming in enough to pay off the liabilities going out? Are they growing in step with those expenditures? etc...
This is your general "is revenue increasing" question you should ask every business, and value with that in mind.
I hope this explanation helpss! Let me know if you have any further questions!
Wow, thanks. yes, it helps, but I see I am bigger noob than I thought. Was aware of premiums, float, etc, some multiples or rations such as loss or combined ratio, but really, need to read more. I also see insurance companies are not huge compounders, you wont keep it couple of years and flip with a 15 x gain, more like 1-2x, if you are buying cheap.. ;) I guess they are more dividend play, some are paying 7-10 % yield now. I am looking at Polish PZU with 11 % div yield (myself being Polish, but got no idea about details herel, except they government ownes 35 % and that they are synonym of insurance company in Poland, just decades of presence there), or Swiss Re, with 7 % yield now (reinsurance). Will read more, thank you again!
Hey, thanks for this summary. Do you have some good resources how to analyze insurance and similar companies? I see revenue is falling here for many years, at the same time net income is rising nicely. What metrics, methods do you use to analyze it and if it is at fair value or lower/higher (again, would love to learn it myself..)
Hi!
That's actually quite an interesting (and complicated) subject that really should be a post of its own, since there's a lot to talk about! I'll see if i add it to the list!
In general though, insurance is quite a simple business to understand if you have any background in statistics, so to me (especially since I do have that background and I work in the area) it's easy to look at their annual report and see what red flags I should look for.
Insurance has 3 key aspects that anyone evaluating the business should look for, those are:
Investible Assets
Insurance Liabilities
New and Ongoing Business
If you get a clear idea of what a given company has for each of them then it becomes fairly easy to judge if the business is doing poorly, or if it's doing well.
So what (and how) do you look for these things?
When it comes to investible assets it's actually quite simple, all US insurers are required to file a breakdown of their investment assets in their 10-K, so all you have to do is read through them and see what sort of assets those are, what sort of return they're providing, and how safe are they. For Aflac over half of their investible assets are in Japanese treasuries, so their risk is almost zero, their corresponding return is quite small as well but not concerningly so. The rest of their assets are generally considered investment grade, hence the risk is also quite small, so Aflac has no red flags there. On the other hand a company like Genworth (see https://tiagodias.substack.com/p/quick-look-genworth-financial?s=w) has most of their assets in non-investment grade bonds, so the risk profile there is significantly higher.
You can also do the same sort of process for their insurance liabilities. This is quite a bit harder, so it helps to read the reports multiple times, as well as understand exactly what liabilities the company has taken on. Health insurers have significantly different risk and cost profiles than car insurers or mortgage insurers, and so on. This sort of thing is where most insurers fail, when they fail to account for certain costs/risks, or account for them improperly, hence it's important to stay away from highly correlated insurers (ie if your company sells earthquake insurance in only california you're going to have a hard time once the earthquake comes!) as well as those insurers who give clients too good of a deal (many of the new "high tech" insurers are vastly underestimating the costs of the insurance policies they are selling, and are effectively losing money on most policies they sell!).
Whenever an insurer says something to the extent of "we're much better at judging the risk than our competitors and that's why we give better rates" that's a massive red flag telling you to stay away!
Finally there's the new and ongoing business. Are the premiums coming in enough to pay off the liabilities going out? Are they growing in step with those expenditures? etc...
This is your general "is revenue increasing" question you should ask every business, and value with that in mind.
I hope this explanation helpss! Let me know if you have any further questions!
Cheers,
Tiago
Wow, thanks. yes, it helps, but I see I am bigger noob than I thought. Was aware of premiums, float, etc, some multiples or rations such as loss or combined ratio, but really, need to read more. I also see insurance companies are not huge compounders, you wont keep it couple of years and flip with a 15 x gain, more like 1-2x, if you are buying cheap.. ;) I guess they are more dividend play, some are paying 7-10 % yield now. I am looking at Polish PZU with 11 % div yield (myself being Polish, but got no idea about details herel, except they government ownes 35 % and that they are synonym of insurance company in Poland, just decades of presence there), or Swiss Re, with 7 % yield now (reinsurance). Will read more, thank you again!