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Do Insurance Stocks Do Better Than Average Over The Long-Run?
www.investing.com/analysis/do-insurance-stocks-do-better-than-average-over-the-long-run-127822
Do Insurance Stocks Do Better Than Average Over The Long-Run?
By David Merkel | Jun 27, 2012 05:32AM ET 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.
Thus I highlight P&C companies with ten year track records. Here are the good ones: ACE (ACE), Chubb (CB), Cincinnati Financial (CINF), Donegal Group (DGIC.A, DGIC.B), HCC Insurance (HCC), Markel (MKL), ProAssurance (PRA), RLI Corp. (RLI), Selective Insurance (SIGI), Travelers (TRV), United Fire Group (UFCS), W.R. Berkley (WRB), Arch Capital (ACGL), Alterra Capital Holdings (ALTE), PartnerRe (PRE), Everest Re (RE), Renaissance Re (RNR), White Mountains (WTM), Progressive (PGR), State Auto Financial (STFC), and Erie Indemnity (ERIE).
And here are the trailing ones: American Financial Group (AFG), Baldwin & Lyons (BWIN.A, BWIN.B), EMC Insurance (EMCI), Navigators Group (NAVG), XL Group (|XL), Allegheny Corporation (Y), American National (ANAT), Allstate (ALL), and Horace Mann (HMN).
And two really lousy ones: CNA Insurance (CNA) and Meadowbrook Insurance Group (MIG).
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.
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Do Insurance Stocks Do Better Than Average Over The Long-Run?
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