Tag Archives: investors

Dinner With Warren Buffett (Part 3)

This is the third article in this series. You can read the other two parts here: Part 1 and Part 2.

In reading Warren Buffett’s letters to shareholders, we found many gems that inform our opinions and beliefs about how to be successful in the insurance industry. We wanted to share these five pieces that we found key:

1. Be great in your niche rather than a generalist

“[A great insurance manager] follows the policy of sticking with business that he understands and wants, without giving consideration to the impact on volume,” Buffett wrote.

Developing an area of expertise and choosing target markets the company understands in-depth is essential to the success of a carrier or of an agency. This is particularly relevant today as new risks are emerging quickly. Attempting to cover a risk you don’t fully understand is a fool’s game.

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2. Underwriting discipline is key for long-term success

“We hear a great many insurance managers talk about being willing to reduce volume in order to underwrite profitably, but we find that very few actually do so,” Buffett wrote.

While it is common to talk about writing business only with strict underwriting criteria, it is hard to avoid the siren song of growth, especially for publicly traded carriers that have to worry about investors who only care about next quarter. Though it is challenging, a good underwriter must practice discipline in choosing the risks that it insures. Profitable companies will understand that this may mean growing more slowly or less than the year before but will ensure profitability.

3. Never downsize your underwriters during slowdowns

“We don’t engage in layoffs when we experience a cyclical slowdown at one of our generally profitable insurance operations. This no-layoff practice is in our self-interest. Employees who fear that large layoffs will accompany sizable reductions in premium volume will understandably produce scads of business through thick and thin (mostly thin),” Buffett wrote.

In his own companies, Buffett professes to never downsize underwriters because of slowdowns in the market Rather, he prefers to keep the extra capacity to be ready to pounce once the market comes around and the business can be written at proper pricing with expected underwriting profitability. If a company wants to commit to profitability, employees must understand that their first priority is profitability. The best way to do this is to make it clear that employees will be rewarded when this profitability is achieved. Assuring employees that they are not in danger of being laid off because of slow growth is an effective signal. In addition, it will be important to manage hiring practices during periods of growth, so that the company is not overstaffed. The company must strive for efficiency during all cycles.

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4. Understand the challenges of commoditization and regulation

“Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and the rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference the people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance,” Buffett wrote.

The fact that the industry is so stringently regulated is a challenge for insurers. It is important, therefore, to hire people who are committed to professional development and growth. If the people in your company are going to be the difference, they must believe in the industry and strive every day to do the best work they can. Supporting your employees’ development efforts will inspire a strong culture of growth and achievement.

5. Reserve conservatively

“We are making every effort to get our reserving right. If we fail at that, we can’t know our true costs. And any insurer that has no idea what its costs are is heading for big trouble. […] The natural tendency of most casualty-insurance managers is to underreserve, and they must have a particular mindset – which, it may surprise you, has nothing to do with actuarial expertise – if they are to overcome this devastating bias. Additionally, a reinsurer faces far more difficulties in reserving properly than does a primary insurer,” Buffett wrote.

Companies must recognize and support the need to have an accurate picture of their costs. To this end, a company should encourage its claims departments to strive for accuracy and report potential losses fairly. If a company does not know what it faces, it cannot set goals that will lead to success. Insurance is an unusual business in that we do not know our cost of goods sold until long after the pricing has been set and the policy has been sold; thus, proper reserving is of do-or-die importance.

Much of Buffett’s advice in these five statements centers on the importance of well-educated and knowledgeable employees, which is one of the key things we push for at InsNerds.

Are We Entering a Bear Market?

We promise, when we wrote our monthly discussion a few weeks back titled, “At the Margin,” we had absolutely no magical insight into the price correction U.S. stocks experienced last week and this, one of the more noticeable in quite some time. You may remember our early August discussion heavily detailed the frailties of human decision-making regarding investments, with particular light being cast on emotional crowd behavior. Greed and fear are two of the most emotionally dominant drivers of decision-making, and two of the greatest enemies of investors. We’ve learned after decades of experience in the financial markets that controlling our emotions is the most important personal exercise for investment decision-making. Having said this, we thought it was important to look at the bigger picture in light of the downward movement in the U.S. and global stock markets over the last several trading days.

Although it’s never fun to experience a price correction, we need to remember that price corrections are normal in financial markets. What is abnormal are markets that go straight up without corrections — or markets that go straight down, for that matter. With all major U.S. equity markets off 10% or more as of this writing, one of the longest periods in market history without a 10% correction has ended. The last time we experienced one was in 2011. The steep correction that has taken place in the last week in U.S. equity markets appears to be a combination of emotional selling and forced selling because of margin calls, as the fundamentals of the markets have not drastically changed in the past week.

Let’s step back for a second.

Is this the beginning of a bear market in US stocks? No one knows. For now, there is not enough “weight of the evidence” to suggest this, but we’re keeping score. Although few probably realize this, about a month ago 20% of the S&P 500 stocks had already fallen 20% from their highs, well before the recent correction in the major indexes. The fact is that a “stealth correction” has already been occurring for some time now. If you own the stocks that have corrected in this manner, you are fully aware. What happened in recent days is that a lot of the “winners” of this year sold off. Historically, market corrections have been nearer an end than a beginning once the leaders finally correct. We will be watching market character closely in the weeks ahead.

It has been so long since we have experienced any type of even semi-meaningful correction in the U.S. equity markets that we have been convinced, when it finally arrived, it would feel like a bear market and emotions would be highly charged. Sound familiar?

Is there plenty to worry about in financial markets and global economies today? You had better believe it, but there has been plenty to worry about for years now in the aftermath of the Great Recession. U.S. corporations and households are a lot healthier today than was the case a number of years ago. Perhaps ironically, it’s the government sector where we find balance sheets impaired. It’s a good thing we can’t buy share ownership in global governments.

The worries will never stop; there is always something to worry about with the flood of data tied to financial markets and global economies. The key is assessing the magnitude of the reality of these worry points and how they may affect real world economic outcomes.

For now, no one knows where the markets will travel with any day-to-day precision. We have been expecting a correction for some time now, although having it happen in just a few days feels like quite the dramatic event. That sense of “free falling” over a short time is never comfortable. We instinctively act to stop the feeling by any means possible; it’s just who we are.

We believe it is imperative to do two things as we move ahead – 1) keep our emotions in check while thinking objectively and 2) assess forward market character on a continuing and intensive basis. As we have stated many a time in our communications to you, risk management is the key to successful investment outcomes over time. We know emotions have recently run higher than has been the case for some time now, and because of this it feels the risks of being invested in the equity markets are greater. If the weight of the evidence tells us this for-now-short-term correction is to become something much deeper, we will not hesitate to take protective action. The key in investing is not pinpointing the market peak prior to a correction nor nailing an exact interim market bottom before a rally. The key is avoiding large bear market drawdowns and participating in favorable market environments to the greatest extent possible.

6 Trends Signaling Major Opportunity

Last year, I decided to pursue a career transition as a full-time occupation. I’ve been out in the market for the past six months, assessing business opportunities as I network with executives in financial services, healthcare, media and retail, as well as with VCs, private equity investors and advisers.

What’s been great is that invariably any role in any organization, however broad, will be framed by the priorities that drive the business, which may be using a short-range lens defined by the annual plan, or one that doesn’t offer much of a peripheral view.  Transition-as-occupation offers full permission to set the aperture and depth of field for insight-gathering and exploration.

What has also been remarkable is not only the generosity of many people at the top of their respective fields to share perspectives, but also how I’ve been able to help others by playing the role of connector among people who may not normally meet up with each other, but who are excited to understand how others are addressing common questions in a complex and changing environment.

Here are six connected trends on the collective mind of the leaders with whom I’ve met. They represent a snapshot of what I am hearing. Within them are opportunities to be realized across this industry:

  • Customer-centricity – is it talk or walk? C-suiters certainly verbalize that “customer-centricity” matters, but few teams demonstrate that empathizing with the customer is bedrock for viable, win/win relationships, growth and profit improvement. The phrase has as many definitions as (or more than) the number of people defining it. Most significantly, the connection to concrete, quantifiable business priorities is generally missing. For those who get beyond the buzzwords, there is tremendous tangible value, even disruptive opportunity, in being a customer-focused player in this sector.
  • Old norms don’t work…digital and innovation are essential. Businesses are faced with redesigning processes, structures and metrics, recruiting more agile learners who are also able to deliver and overcoming legacy infrastructure to adopt new technologies. This level of change in the way businesses operate is not for the faint-hearted. The companies that take on these real implementation requirements will gain ground.
  • Yes, technology truly is changing everything. Even with greater efficiency, there is no growth without compelling offerings that meet big market needs. For companies engineered to serve baby boomers, serving the millennial generation requires profound change, not just a digital coat of paint. The implications go way beyond having a social media presence, cool apps and clever advertising. The millennial generation is inheriting a different world, re-shaped in good and bad ways by prior generations.  The starting point for progress is to be truly insight-led, and not presume you know what people want and need.
  • The marketing bar is being raised. This discipline has been disrupted, and more is being demanded. Traditionally viewed as “support” people, marketers are now being held to results that require a different seat at the table, a different talent profile, processes and resources and an entirely new set of connections with colleagues and external partners. Begin by redefining relationships, especially with product, IT and sales internally, and with the advertising and media agencies as key outside partners.
  • Two tales are playing out within financial services. Legacy institutions remain heavily focused on regulation, compliance, expense reduction and cyber security…while fin tech is hot, with capital flowing into payments, wealth management, consumer lending and related start-ups pursuing market disruption and reshaping the industry. Start-ups are doing great things in this sector and will keep incumbents on their toes, as well as representing potential acquisition opportunities as a strategy to modernize. Alignment around a clear strategy and a collaborative culture are at the foundation of leading change vs. playing defense.
  • Healthcare disruption is creating opportunities, but the pace is slow. Payers and providers are aiming to address Affordable Care Act and other government, employer and consumer-driven impacts.  Using electronic medical records, controlling employer healthcare expenses and enabling patient accountability for medical care decisions are just three of many big and complex challenges. The road to change will be long and slow given the sheer complexity and fragmentation of healthcare delivery. As in financial services, new entrants are leading innovation with solutions that address elements of the ecosystem. As in financial services, there is room for incumbents to realize opportunity with the right strategic and cultural conditions.

5 Ways Insurance Supports the Economy

Insurance affects everything, and everything affects insurance. It is generally understood that insurance allows those who participate in the economy to produce goods and services without the paralyzing fear that some adverse incident could leave them destitute or unable to function. However, few people are aware of the extraordinary impact the industry has on state, local and national economies. Here are five ways that happens:

Driving Economic Progress

The insurance industry is a major U.S. employer, providing some 2.6 million jobs, according to the Current Population Survey from the U.S. Department of Labor.

Insurers contribute more than $413 billion to the nation’s gross domestic product.

In 2013, property/casualty insurers and life insurers incurred federal and foreign taxes of about $20.6 billion. Insurance companies, including life/health and property/casualty companies, paid $17.4 billion in premium taxes to the 50 states in 2013, or about 2% of all state taxes.

Investing in Capital Markets

Insurance companies also help support the economy by investing the funds they collect for providing insurance protection. The industry’s financial assets were about $6 trillion in 2013, including $1.2 trillion for the property/casualty sector and $4.7 trillion for the life sector.

In 2013 alone, property/casualty insurers’ holdings in municipal bonds totaled $326 billion, according to the Federal Reserve. Life insurers held $1.8 trillion in corporate stocks and $2.2 trillion in corporate and foreign bonds in 2013, according to the Federal Reserve.

Supporting Resiliency and Disaster Recovery

Property/casualty insurers covered $35 billion in catastrophe losses in the U.S. in 2012 and $12.9 billion in 2013, according to the Property Claim Services (PCS) division of Verisk.

Supporting Businesses, Workers, Communities

Property/casualty insurers pay out billions of dollars each year to settle claims.  Many of the payments go to local businesses, such as auto repair companies, enabling them to provide jobs and pay taxes that support the local economy.

Life insurance benefits and claims totaled $586 billion in 2013, including life insurance death benefits, annuity benefits, disability benefits and other payouts. The largest payout, $249 billion, was for surrender benefits and withdrawals from life insurance contracts made to policyholders who terminated their policies early or withdrew cash from their policies.

Empowering Lenders

Specialized insurance products protect lenders and borrowers, shielding businesses such as exporters from customer defaults and facilitating the financing of mortgages and other transactions. These products include credit insurance for short-term receivables.

Credit insurance protects merchants, exporters, manufacturers and other businesses from losses or damages resulting from the nonpayment of debts owed them for goods and services provided in the normal course of business. Credit insurance facilitates financing, enabling insured companies to get better credit terms from banks.

For the full report from which this article is adapted, click here.