How to analyze a general insurance business using Warren Buffett’s method?Learn to spot 🍋

Putting Buffett wisdom in action — in simple lang

Combined Ratio       FY23  FY24  FY25
New India Assurance   117.2% 120.9% 119.1%
GoDigit          107.4% 108.7% 108.6%
ICICI Lombard      104.5% 103.3% 102.8%
Star Health       95.3% 96.7% 101.1%
Niva Bupa 97.1% 98.8% 101.2%

The 𝗰𝗼𝗺𝗯𝗶𝗻𝗲𝗱 𝗿𝗮𝘁𝗶𝗼 𝗖𝗼𝗥 for general insurers is a simple way to measure how profitable an insurer is from its core business i.e underwriting policies

CoR = claim payouts + expenses an insurance company has, divided by the premiums it earns — expressed as %

CoR < 100% — Insurer is making a profit from underwriting
CoR = 100% — Break even
CoR > 100% — Underwriting losses (claims + expenses > premiums)

So does that mean Star and Niva Bupa are the only profitable insurers and multiline insurers are incurring losses? No!

General insurers have another source of income — Interest Income on Float

𝗪𝗵𝗮𝘁 𝗶𝘀 𝗙𝗹𝗼𝗮𝘁?

Insurers collect premiums upfront, but often don’t have to pay a lot of claims until later — sometimes years later. During that time, they invest the remaining premium money (called “float”) to earn interest income

Buffet calls 𝗳𝗹𝗼𝗮𝘁 the money, insurers hold, but don’t own

The longer an insurer is able to hold float, the more interest income it makes.
Btw, how do you get a sense of the float holding period?
Insurers with total float size overtime >> premium collection in a year — have high float retention

New India Assurance, Go Digit and ICICI L — float size 2x premiums
Star Health, Niva Bupa — 1x
Multiline insurers seem to be retaining float for longer. Why do you think?

if 𝗖𝗼𝗥 > 𝟭𝟬𝟬% (i.e small losses in core business), insurer can still be overall very profitable if they have accumulated a lot of float overtime — thru good holding periods
e.g ICICI Lombard

if 𝗖𝗼𝗥 >> 𝟭𝟬𝟬% then the UW loss is significant and it eats into the interest income
e.g New India Assu., GoDigit

A low 𝗖𝗼𝗥 <= 𝟭𝟬𝟬% is always desired
e.g Star and Niva Bupa
but you have to be careful

Low CoR 𝘮𝘢𝘺 𝘣𝘦 because of low claim payouts much at the dismay of customers. If customers are not happy, they will stop renewing and hence float accumulation will slow down overtime

Summary
CoR <=100% overtime is always desired, but low does not always equate to good. So double click to ensure it isn’t a lemon 🍋
CoR slightly >100% overtime is fine so long as the insurers has accumulated sizable float relative to premiums
CoR >> 100% and float is not significant relative to premiums — you have a🍋
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Want to understand hashtag#WarrenBuffett method of evaluating a general insurer in detail? Watch this linked video: