P&C insurance

[bergman104]

Has anyone been looking into P&C insurance companies? They've been getting hit pretty hard in this environment. I've been trying to find historically good underwriters, ideally combined ratios of <95%. TRV, WRB, and AFG come to mind. The current interest rate environment is a bit worrisome though.

[BroKon]

I have been looking at the below for the last few days (I added their 5y average CoR for ease - although some are more volatile):

 

Beazley 94.6%

Lancashire Holdings 89.7%

Arch Capital (more of a mortgage insurer) 87.3%

Hiscox 93.9%

Markel 96.2%

Berkshire (for comparisons purposes - not a great combined ratio as increasing float is primary goal, but that's not news)

 

They all have issues in this environment, so I haven't come to any definitive conclusions on which one to invest in yet.

[Nelson]

What about Intact on the TSX (TSX:IFC)? Excellent long-term performance with consistently solid underwriting numbers.

[Pedro]

Intact didn't have a standard virus exclusion across policies according to the q1 call. . If lawyers are going to win, they are going to win from them for not having a clear exclusion in the contact.  I wouldn't swing at that pitch. Not good underwriting controls in place

[mranski]

It always surprises me how much is written about Fairfax when to me, the best Canadian P&C company (Intact) is barely mentioned on this board. Unfortunately it is priced at over 2x book usually. It is hard to say what their covid exposure is so I would get some clarity there first, but it might create an opportunity.

[Spekulatius]

CINF is another P&C insurer that doesn’t have expect Virus exclusions in their contracts. Ever since they disclosed this on their CC, the stock has been weak.

 

TRV has explicit Virus exclusion in most of their contracts according to their last CC. I recently bought some. CB also seems OK, but was a bit more Evasive. They have been good underwriters traditionally.

 

Note that business interruption is Traditionally only meant to pay in case it prevents the business from operating due to property damage , but apparently they will get tested by some lawyers. It’s much more harder to argue for paying when it is explicitly  excluded, so I think lawyers will go after those that don’t have the Virus exclusion.

[scorpioncapital]

esgr is pretty cheap. like 1/2 book and they don't really do active underwriting , just runoff. they have made somewhat of a mess of the investment portfolio. not much focus but seems cheap.

[plato1976]

what's berkshire insurance's exposure to the pandemic?

I think geico is immune to it, but re-insurance can take a hit? but how?

 

Has anyone been looking into P&C insurance companies? They've been getting hit pretty hard in this environment. I've been trying to find historically good underwriters, ideally combined ratios of <95%. TRV, WRB, and AFG come to mind. The current interest rate environment is a bit worrisome though.

[samwise]

Has anyone looked at PGR Progressive?

 

They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat.

 

I am also impressed that they report monthly. Must have really good systems internally.

[Spekulatius]

Has anyone looked at PGR Progressive?

 

They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat.

 

I am also impressed that they report monthly. Must have really good systems internally.

 

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

[bergman104]

Has anyone looked at PGR Progressive?

 

They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat.

 

I am also impressed that they report monthly. Must have really good systems internally.

 

 

Spekulatuis,

 

Do you normally value P&C insurance companies based on book? Do you take float into consideration?

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

[samwise]

 

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

 

Why EV/sales as a metric? Do you expect earnings/sales to falls?

 

It’s not expensive on P/E (like most financials. )

 

[Spekulatius]

 

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

 

Why EV/sales as a metric? Do you expect earnings/sales to falls?

 

It’s not expensive on P/E (like most financials. )

 

Yes, margins are currently above average and using my price/ sales target would account for mean reversal.

[samwise]

Thanks Spek.

[lnofeisone]

Has anyone looked at PGR Progressive?

 

They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat.

 

I am also impressed that they report monthly. Must have really good systems internally.

 

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

 

PGR doesn't write its own property. They offload it to the likes of Homesite and First American. This is the reason for their wildly inconsistent policies and pricing across the markets, interesting complaint rates patterns, and varying agent experiences. They are very strong when it comes to auto/motorcycles though I'm not a buyer at these valuations.

 

On a personal note, we switched from Progressive to Erie (home/auto/umbrella) because the quote was about the same but Erie's coverage was substantially better.

[Spekulatius]

Has anyone looked at PGR Progressive?

 

They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat.

 

I am also impressed that they report monthly. Must have really good systems internally.

 

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

 

PGR doesn't write its own property. They offload it to the likes of Homesite and First American. This is the reason for their wildly inconsistent policies and pricing across the markets, interesting complaint rates patterns, and varying agent experiences. They are very strong when it comes to auto/motorcycles though I'm not a buyer at these valuations.

 

On a personal note, we switched from Progressive to Erie (home/auto/umbrella) because the quote was about the same but Erie's coverage was substantially better.

 

I wasn’t aware of PGR not writing it’s own property insurance - then it  sounds like the deal Geico had with Traveller where they resold Traveller homeowners as a bundle.

 

I found that I can beat Geico’s standalone and bundle price every time with a bundle from an other insurer. In CA, that was Mercury and now on the East coast, with mutual insurers.

[gfp]

Speaking of Mercury - the elderly chairman and others have been buying shares almost daily in a pretty big way.  Mercury is mostly auto, not much commercial multiple peril.

 

https://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0000064996

https://www.dataroma.com/m/stock.php?sym=MCY

[rb]

Has anyone looked at PGR Progressive?

 

They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat.

 

I am also impressed that they report monthly. Must have really good systems internally.

 

Yes, PGR is a LT winner. They have increased their revenue growth going into property insurance (they used to do only car) and it’s not clear if they have the same advantage there. It’s trading a bit above its LT valuation baseline. I would buy it if I can get it below 1x EV/ sales.

I absolutely love PGR. It's a fantastic business. I've been watching it for years waiting for a good prices to get in. All I've seen was the price going up. I've finally decided that this is just one of those businesses that you have to pay up for if you want it and bought some. They've been growing so much that if they would drop to the price it was at 2 years ago that would imply a ridiculously low valuation.

[KJP]

 

Note that business interruption is Traditionally only meant to pay in case it prevents the business from operating due to property damage , but apparently they will get tested by some lawyers. It’s much more harder to argue for paying when it is explicitly  excluded, so I think lawyers will go after those that don’t have the Virus exclusion.

 

All policy variations are being tested, even those with virus exclusions.  See, for example, this high profile case involving Travelers:  https://www.law360.com/articles/1265750/travelers-sues-geragos-law-firm-in-virus-coverage-dispute

 

For an overview of the various theories insureds are pursuing, see here:  https://www.law360.com/pennsylvania/articles/1273308

[samwise]

I absolutely love PGR. It's a fantastic business. I've been watching it for years waiting for a good prices to get in. All I've seen was the price going up. I've finally decided that this is just one of those businesses that you have to pay up for if you want it and bought some. They've been growing so much that if they would drop to the price it was at 2 years ago that would imply a ridiculously low valuation.

 

I would do the same if I had confidence that their earnings would keep growing, which means

1. Capturing more market share.

2. No or low mean reversion in combined ratios.

 

Do you have confidence in their growth? Their lead is supposedly in loss ratios, not structural costs like GEICO. Isn't that just a matter of building better models for underwriting. Why won't others catchup? (Their is a 8 year old VIC writeup, I think).

[rb]

I absolutely love PGR. It's a fantastic business. I've been watching it for years waiting for a good prices to get in. All I've seen was the price going up. I've finally decided that this is just one of those businesses that you have to pay up for if you want it and bought some. They've been growing so much that if they would drop to the price it was at 2 years ago that would imply a ridiculously low valuation.

 

I would do the same if I had confidence that their earnings would keep growing, which means

1. Capturing more market share.

2. No or low mean reversion in combined ratios.

 

Do you have confidence in their growth? Their lead is supposedly in loss ratios, not structural costs like GEICO. Isn't that just a matter of building better models for underwriting. Why won't others catchup? (Their is a 8 year old VIC writeup, I think).

Oh they have a structural cost advantage, just like GEICO, for the direct business which is the high growth business. The agency business is dragging them back.

 

But yeah, my confidence in growth is driven by market share. I think both PGR and GEICO are gonna keep growing market share and they're gonna slaughter the likes of AllState.

 

I don't think there's much threat from the competition. It's very hard to transform/adapt/copy them. In fact the only "traditional" company to go direct successfully anywhere in the world that I know of has been Progressive. They've put in a lot of work to thread that needle.

 

They're not that good on the investing side, but they're not bad either. I like that they acknowledge that it's not a strength of theirs so they stay in their lane. That means that they won't go out and do a bunch of dumb shit on the investing side. So I'm fine with that.

[samwise]

Thanks rb.

[jasonchin]

Their investments are mainly in index fund (equity component), so they are not the usual Berkshire or Markel. The CEO has the right mindset in building for the long run. She was also in a few of the company's commercial directly which is one of the unique selling point about PGR. According to the CEO, their digital platform will be a game charger in the longer term. Lastly, quite impressed with the level of detail disclosed in their reports and highly recommend receiving a hard copy if you are a shareholder. 

[pricingpower]

PGR has been my largest holding for years, auto insurance is a great industry for now with sleepy competitors, by being at the forefront of using telemetrics data I love how pgr has been long term greedy and taken reduced near term revenue for a stickier harder to assault customer relationship (30pct discount to a great driver makes it really hard for anyone to poach them but gives up a lot of near term easy profits).  The home insurance seems like a somewhat forced response to the 15+ years out autonomous vehicles business model threat but I like how they reinsure most of that risk while learning the underwriting and trying to make economics via sticker customers.

In the long term I think of each dollar of premiums if they can make 4pts of underwriting, 4 pts of investment returns and 1-2 dollars of return on additional equity funded investments that more than justifies trading at 1x premiums written which themselves have been growing low double digits as pgr and geico take all the industry net growth.  They can then reinvest 5% of salrs into equity to grow premiums 15pts and return the rest to shareholders even while growing that fast (used to be returned via a variable dividend formula they recently changed given the speed of growth).  Its a fearsome flywheel.  I also like it directly benefits from higher interest rates.  Recently they have overearned vs this on underwriting but ought to earn less in investments.

[samwise]

Recently they have overearned vs this on underwriting but ought to earn less in investments.

 

Do you think they are over-earning overall?

 

I took another look today after rb’s response. The net margin has risen from ~5-6% to 8% in the last 5 years, directly correlating to a lower combined ratio. And they have captured market share. The share capture is likely permanent, and will continue, as will the structurally lower expenses. But won’t the CR rise, lowering margins by about 2/8=25%? They would need their sales to rise 25% to overcome that, which could be couple of years if the current momentum continues, or longer if the momentum fades. In that case, the multiple probably contracts too. So you can have flattish revenue, lower margins, lower multiple. Pretty bad for the stock price.