Austin Roberts

Insurance Stocks May Finally Pay Off

Insurance is one of the few industries where "scuttlebutting" -- or deep research via industry contacts -- is necessary get solid information. I have a number of industry contacts that I've made through the years, and I use them extensively in my research. I suggest you do the same if you invest in this sector. Most people would be amazed just how much time and information you can obtain from executive management of publicly-traded companies. It is much easier to get quality face time with CEOs of small companies, but there are a number of large (Fortune 500) companies of which I've successfully been able to get through to executives. In this way you can get a good handle on "attitude," towards both the business itself and towards shareholders. Without compromising insider information, a persistent and clever investor can talk to executives and come away with knowledge that will put you leaps and bounds ahead of the general investing public. You'll have a big "edge" if you know management is working to make money with shareholders, and not off of them.

You can look at historical financials to see if any advantage in underwriting exists, but to find the source of the advantage, you'll have to scuttlebutt. What kind of reputation does the insurance company have with their brokers? With retail agents? With insureds? What is their reputation for claims handling?

Insurance is a research-intensive industry, but it can pay off big if you do your homework.

The greatest risk for insurers right now is two-fold: solvency and liquidity. To play it relatively safe, I only consider investments in companies that have strong financial positions, good cash flows, and savvy, shareholder-friendly management teams. On top of that, if you can find an insurer with the ability to earn above-average return on capital, you may do very well over time.

There are lots of insurers out there with questionable books of underwriting business and and questionable investments, and they're all working hard to instill confidence in their investors even if they know they're on shaky ground. So if I were you I'd be picky about which companies you invest in.