Property and casualty insurance companies which combine disciplined underwriting with solid investing can generate wealth. The good ones produce what has been called “structural alpha” because their float gives them low-cost – or no-cost – leverage. The best ones actually generate a profit on their float. Returns are typically lumpy because the insurance industry is inherently subject to episodic events which generate large numbers of claims.
A good point to get greedy is when they trade at or below book value. Another metric to track is the ratio of investments per share to the share price. For example, consider a case where you could buy a good P&C company at $100 per share that holds $300 per share in investments. If the company has a history of generating long-term investing results of 6% it implies an 18% return on your initial carrying cost.
Here are a few names to track taken from Fairfax Financial’s 2010 Annual Slide Presentation. These results include a very difficult time in the stock market. I have also included three additional slides which show Fairfax Financial’s long-term performance. Although much less known than Warren Buffett, Prem Watsa of Fairfax Financial – sometimes called “the Warren Buffett of Canada” – and Tom Gayner of Markel are worth studying. By way of disclosure, I am long Fairfax, Berskhire and Markel.
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