Do Insurance Stocks Do Better than Average Over the Long-Run?

Why should insurance companies be such a good place to invest?  That’s a great question, and I will try to outline an answer.  Before I do, let me draw a few distinctions:

  • I’m not talking about life companies, they are far more capital encumbered then P&C companies.
  • I am also not talking about title, mortgage, or finance insurers.  They are too risky, and that was my opinion in the early 2000s.
  • Health insurers have a different model, much more subject to regulation.
  • Many insurance companies that don’t survive 10 years as a public company do poorly.  They did not underwrite well.
  • Small companies tend to fail disproportionately.
  • We aren’t talking about specialty companies.

What I am talking about are non-microcap companies with stable P&C liability structures and conservative reserving.  Boring, maybe.  Simple, somewhat, but you try setting up a competitor to them.  It takes some doing.  That is the competitive advantage; it is the barrier to entry.  Few companies have diversified liabilities; fewer reserve conservatively.

Thus I highlight P&C companies with ten year track records.  Here are the good ones: ACE, Chubb, Cincinnati Financial, Donegal Group, HCC Insurance, Markel, ProAssurance, RLI, Selective Insurance, Travelers, United Fire Group, W.R. Berkley, Arch Capital, Alterra Capital Holdings, PartnerRe, Everest Re, Renaissance Re, White Mountains, Progressive, State Auto Financial, and Erie Indemnity.

And here are the trailing ones: American Financial Group, Baldwin & Lyons, EMC Insurance, Navigators Group, XL Group, Allegheny Corporation, American National, Allstate, and Horace Mann.

And two really lousy ones: CNA Insurance and Meadowbrook Insurance Group.

On the whole, the outperformers more than absorb the underperformers, though I can’t prove that, for these reasons:

  • Hasn’t happened much in a while, but P&C insurance companies do occasionally die & disappear.  Think of Reliance Insurance Company.
  • Sometimes P&C companies make very bad underwriting decisions, lose a dramatic amount of money, and their stock prices fall enough that they get taken over, e.g., PXRe would be an example.
  • I may be guilty of selection and survivor bias by sticking with diversified bigger firms that are at least 10 years old.  I know of a lot of smaller firms that flame out because they take too much underwriting risk due to hubris and/or inexperience.

To do a complete study, we would have to use the CRSP database, which has all of the data for stocks not currently living.  We would see the losses from insolvencies, and the losses/gains fhereof.  It would take place at the halfway point for US efforts, which would be 4 seconds ahead of the Greeks as they hurried to compete/complete at constant speeds.

That’s what would happen.  Now before I go, I want to leave charts behind for the stocks mentioned:

Above

  1. http://finance.yahoo.com/q/bc?t=my&s=ACE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  2. http://finance.yahoo.com/q/bc?t=my&s=CB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  3. http://finance.yahoo.com/q/bc?t=my&s=CINF&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  4. http://finance.yahoo.com/q/bc?t=my&s=DGICB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  5. http://finance.yahoo.com/q/bc?t=my&s=HCC&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  6. http://finance.yahoo.com/q/bc?t=my&s=MKL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  7. http://finance.yahoo.com/q/bc?t=my&s=PRA&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  8. http://finance.yahoo.com/q/bc?t=my&s=RLI&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  9. http://finance.yahoo.com/q/bc?t=my&s=SIGI&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  10. http://finance.yahoo.com/q/bc?t=my&s=TRV&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  11. http://finance.yahoo.com/q/bc?t=my&s=UFCS&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  12. http://finance.yahoo.com/q/bc?t=my&s=WRB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  13. http://finance.yahoo.com/q/bc?t=my&s=ACGL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  14. http://finance.yahoo.com/q/bc?t=my&s=ALTE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  15. http://finance.yahoo.com/q/bc?t=my&s=PRE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  16. http://finance.yahoo.com/q/bc?t=my&s=RE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  17. http://finance.yahoo.com/q/bc?t=my&s=RNR&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  18. http://finance.yahoo.com/q/bc?t=my&s=WTM&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  19. http://finance.yahoo.com/q/bc?t=my&s=PGR&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  20. http://finance.yahoo.com/q/bc?t=my&s=STFC&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  21. http://finance.yahoo.com/q/bc?t=my&s=ERIE&l=on&z=l&q=l&c=&ql=1&c=^GSPC

Below

  1. http://finance.yahoo.com/q/bc?t=my&s=AFG&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  2. http://finance.yahoo.com/q/bc?t=my&s=BWINB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  3. http://finance.yahoo.com/q/bc?t=my&s=EMCI&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  4. http://finance.yahoo.com/q/bc?t=my&s=NAVG&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  5. http://finance.yahoo.com/q/bc?t=my&s=XL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  6. http://finance.yahoo.com/q/bc?t=my&s=Y&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  7. http://finance.yahoo.com/q/bc?t=my&s=Y&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  8. http://finance.yahoo.com/q/bc?s=ANAT&t=my&l=on&z=l&q=l&c=^GSPC
  9. http://finance.yahoo.com/q/bc?t=my&s=ALL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  10. http://finance.yahoo.com/q/bc?t=my&s=HMN&l=on&z=l&q=l&c=&ql=1&c=^GSPC

Well Below

  1. http://finance.yahoo.com/q/bc?t=my&s=CNA&l=on&z=l&q=l&c=&ql=1&c=^GSPC
  2. http://finance.yahoo.com/q/bc?t=my&s=MIG&l=on&z=l&q=l&c=&ql=1&c=^GSPC

So though I know many value investors think a lot of P&C insurers, my answer on whether they are a generally good industry to invest in is “possibly,” but not “certainly.”  There are advantages for sophisticated investors that can understand complex accounting and its limitations, as well as those that can sense whether a management team is conservative or not.  That may be part of the reason for how I limited the selection of companies above; I was trying to mimic what sort of companies tended to last a long time; they tend to be conservative.

That’s all for now; criticism is welcome.

Full disclosure: Long HCC , TRV

PS — I will be gone the next three days, and posting will be irregular, as it has been recently.

5 Comments

  • vonjd says:

    I is well known that Warren Buffet loves insurance companies because of their steady income stream.

    On the other hand: Look at tail risk, see e.g. AIG! In a way it is like selling vol…

    • mhargra says:

      But was AIG really an insurance company, more importantly a P&C?

      Great insight as always David. I haven’t looked at all the data yet, will try to do so, but find it interesting that it appears that the mid-cap, per se, is the sweet spot. Too small, especially in the insurance world and you can be broke easily, too big and the companies reach too far or can’t navigate and capitalize on niches.

  • Thanks for this excellent article. I would like to add the statistics I have found.

    The following chart over the last 5 years support your view that companies (ticker ^AMBUPC) in the AM Best P&C insurance index do better than the S&P 500:

    http://finance.yahoo.com/q/bc?t=my&s=%5EAMBUPC&l=on&z=l&q=l&c=&ql=1&c=%5EGSPC

    This chart shows a 20-year comparison between the S&P 500 and the Nasdaq insurance index (ticker ^IXIS):

    http://finance.yahoo.com/q/bc?t=my&s=%5EIXIS&l=on&z=l&q=l&c=&ql=1&c=%5EGSPC

    I wonder if insurance companies listed on the nasdaq are a special subset of all insurance companies. As you can see they have performed much better than the S&P 500. Over the last 5 years the insurance companies in the Nasdaq insurance index have almost the same performance as those in the AM Best P&C insurance index.

    So something to check would be whether the Nasdaq insurance index has contained mainly P&C companies over the last 20 years.

    The charts might underestimate the actual over performance. P&C insurance companies could be paying more dividends than the S&P 500. The first thing to check would be if this is the case at the moment.

  • Conscience of a Conservative says:

    I bought aig , held it for 15 years and then lost all the gains, and subsequently bought chubb. Hope insurance has a future.