Shane,
Though I am an industry outsider, I agree with a lot of your points:
- largely commoditized product - yes. Every company claims they have special brand/relationship/niche but overall it is a commodity.
- slow growing market - fighting over fixed pie. - yes
- many state regulators, at least in states I deal with, are difficult - I don't have insight on this. Some of my investments are reinsurers, so maybe this applies less to them.
- catastrophe exposure / risk of ruin (more trouble in property than in auto) - yes. Potentially this is a bigger issue for reinsurers. Question though: do you think that insurers don't reinsure enough?
- some major players are mutual companies and are willing and able to run certain lines at loss for extended periods, or at least aren't under pressure to have profits (but just break even). - I don't have insight on this. Less of an issue in reinsurers?
Perhaps you are right that the book value increase is not enough to say that the company is healthy/doing great. Obviously if policy pricing sucks while we get couple more cat years like this one, the book values of a bunch of P&C insurers and reinsurers will suffer. And then even 10-year 10%+ average annualized growth can disappear really fast with yearly losses.
You are also right, that deep analysis is very hard. I am guilty of the fact that I mostly look at p/book + longer term book value growth + some reputation analysis and go with that. Perhaps it is too risky approach. Like I said in other posts, there are issues not captured in my analysis:
- Is this year a "new normal" on cat frequency?
- Will cos suffer from the superlow interest rates on fixed income? (And were the past earnings inflated by the treasury runup while yields dropped?)
- Will cos invest into risky paper to bump up low yields and then collapse as that paper defaults?
From our discussion, I am inclined to keep/add to my Fairfax position, although I don't agree with deflationary thesis Prem Watsa is pursuing. I may buy some CB. I did not like the very slow book-value-per-share growth at TRV, so I skipped it. I have not looked at Zurich yet. |
