Unlike much of life, insurance is about metrics, not poetry. Indeed, most value investors have a favorite insurer run by a management team they respect. More often than not, it is a celebrated investor, who deploys float to advantage.
However, there is another class of insurance all-stars which have made their reputation, and profits, on excellent underwriting - an even rarer prowess. Although these companies are invariably respected within the industry, most investors have never heard of them, making them undervalued in relation to their quality.
The added advantage of investing in strong underwriters is that their operations are coveted by acquirers. Capital allocators always look to acquire, if possible, a superb underwriter which will give them an excellent source of funds to deploy. That was the raison d'etre for Berkshire's (BRK.A) acquisition of GEICO.
Unfortunately, some of the stocks below are partially owned by other insurers. However, even so, there are some changes that could be made, which might boost shareholder value even beyond that enjoyed by their present strategies.
Below are my rankings for US insurers if I was forced to rank them by underwriting operations (i.e., in a league of their own with excellent historical combined ratio performance and reserving ... ):
- CNA Surety (SUR) (Latest Qtr. Combined Ratio is 82.8)
- National Interstate (NATL) (Latest Qtr, Combined Ratio is 86.5)
- Progressive (PGR) (Latest Qtr. Combined Ratio is 90.9)
- RLI Corp. (RLI) (Latest Qtr. Combined Ratio is 89)
CNA Surety is the crown jewel of CNA Financial (CNA), which owns over 60% of it. Too bad it isn't bigger. It is probably the best surety company in the US. We may explore it further in future articles. In addition, SUR is selling at a discount to tangible book value, which makes no sense whatsoever, in my opinion.
National Interstate (over 50% owned by American Financial Group (AFG)) focuses on traditional and alternative property and casualty insurance products primarily for the passenger transportation industry and the trucking industry. It's good to remember that in underwriting more specialized risks = better pricing = better combined ratio.
Progressive needs no introduction. I would place it on par with GEICO as an underwriter.
RLI Corp. focuses on specialty lines, including professional liability, commercial transportation, commercial and personal umbrella liability, and general liability. Remember, more specialized risks = better pricing = better combined ratio.
Disclosure: Author long SUR, NATL, PGR and RLI