Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Income Statement of Property/Casualty Insurance Company
Premium revenue is also known as earned premium. This premium revenue is used to fund:
Claim payments (loss expense).
Sales commissions for insurance agents
Operating expenses (OPEX)
Claim expenses, for example, typically consume 75% of an
insurer’s net revenues.
(1)+ (2) + (3) / Premium revenue = Combined ratio
Combined ratio is an insurance company’s key underwriting
A combined ratio under 100 indicates an underwriting
For example: A
combined ratio of 95 means that the insurer paid out 95% of its premium
revenue for losses. The 5% remaining is
the underwriting profit.
A combined ratio exceeding 100 indicates an underwriting
For example: An
insurer with a combined ratio of 105 paid out 105% of its premium revenue to
cover losses, meaning that it had an
underwriting loss equal to 5% of revenues.
Companies with combined ratios exceeding 105 for more than a
short time have a difficult time recouping their losses via investment
earnings, and this type of poor underwriting track record suggests that an
insurer’s competitive position is unusually weak. Insurers unable to earn even the occasional
underwriting profit will produce the industry’s poorest returns and may be
tempted to accept large investment risks to boost profitability.
Investment income of Insurance companies
Insurers also make money from investment income. They are often reported as a ratio of
Adding the investment ratio to the combined ratio yields the
operating profit ratio. In many
instances, investment income is a key profit determinant because it offsets
Combined ratio + Investment
ratio = Operating Profit ratio
Balance Sheet of Property/Casualty Insurance Company
In addition to float, most insurers invest a large portion
of their own retained earnings as well.
The investment account reveals the size of an insurer’s investments
relative to its asset base and details the asset allocation employed.
Look at the asset allocation of this investment
account. Look for insurers with no more
than 30% invested in equities (unless the company is run by Warren Buffett).
Unearned Premiums of Property/Casualty Insurance Company
Unearned premiums represent premiums received but not yet
This oddity reflects an accounting convention. When an insurer receives a premium, it is
deemed to earn it gradually across the year.
After all, if a customer cancels a policy, the insurer must refund that
portion of the coverage not consumed.
After six months, an annual auto policy would be 50% earned, and half the premium would be
considered revenue. Before this occurs,
the premiums are held in the unearned premium account, and the insurer is free
to invest them.
The best property/casualty insurer is one that is able to
consistently earn underwriting profits on a large, growing customer base. In effect, this insurer would be getting paid
to profit from investing other people’s money and could retain this float
indefinitely (as long as it grows). Unfortunately, for investors, these situations