How to Analyse Insurance Companies

To analyse an insurer, check whether it underwrites profitably using the combined ratio, how it manages its float (customer premiums held before claims are paid), how fast book value per share grows, and how conservatively it invests and reserves. Disciplined underwriting beats growth every time.

Where this fits: insurers are financial businesses that turn promises into cash flow, so this guide adapts the Five Criteria framework to insurance. Pair it with price to book value, because book value is the natural lens for insurers.

An insurer sells a promise: pay us a premium now, and if something bad happens, we will pay you later. That simple arrangement hides one of the most interesting business models in the market — and one of the easiest to get wrong, because insurers can look wonderful for years while quietly building up trouble.

The reason great investors have loved insurance is that a well-run insurer gets to hold other people’s money and invest it in the meantime. The reason bad insurers blow up is that it is dangerously easy to report profits today by underpricing risk and under-reserving for claims that will only arrive tomorrow. Learning to tell the two apart is the whole game.

The combined ratio: do they make money underwriting?

The first and most important question is whether the insurer actually makes money on the insurance itself, before any investment returns. The tool for this is the combined ratio, which has two parts.

• Loss ratio: claims paid (and reserved) divided by premiums earned. It measures how well the insurer priced its risk.
• Expense ratio: operating and acquisition costs divided by premiums. It measures how efficiently it runs.

Add them and you get the combined ratio:

• Below 100% — the insurer earns an underwriting profit. It is being paid to hold your money.
• Above 100% — the insurer loses money on underwriting and depends on investment income to make up the gap.

A consistently sub-100% combined ratio across several years, including bad ones, is the mark of a genuinely well-run insurer. A single good year proves nothing; weather, large claims and pricing cycles make any one year noisy. Read the combined ratio the way you would read quality of earnings — as a test of durability, not a snapshot.

Metric	What it tells you	Good sign
Loss ratio	Pricing and claims experience	Stable and sensible for the lines written
Expense ratio	Operating efficiency	Low and steady
Combined ratio	Underwriting profitability	Consistently below 100%
Book value per share	Intrinsic value growth	Rising over many years
Reserve development	Reserving conservatism	Favourable, not adverse

Float: the engine beneath the model

Here is what makes insurance special. An insurer collects premiums today but pays claims months or years later. In between, it holds a large and often growing pool of money called float, and it invests that money for its own account.

If the insurer breaks even on underwriting — a combined ratio around 100% — then it is holding and investing all that float at no cost. If it earns an underwriting profit, the float is better than free: the insurer is effectively being paid to borrow. This is why Warren Buffett built so much of his record around insurers; low-cost float, compounded over decades, is a formidable engine.

So two questions sit at the heart of insurance analysis:

1. How much does the float cost? (Answered by the combined ratio.)
2. How well is the float invested? (Answered by the investment portfolio.)

A great insurer scores well on both: disciplined underwriting that produces cheap float, and a sensible, conservative investment book that compounds it.

Reserving: where the bodies are buried

An insurer must estimate today how much it will eventually pay for claims that have already occurred but are not yet settled. These estimates are reserves, and they are the single most important judgement call in the business — because they flow straight into reported profit.

Set reserves too low and profit looks great now, but future years absorb the shortfall. Set them conservatively and current profit is more modest but far more trustworthy. This is the clearest example in any sector of why cash and accounting can diverge, and why you must read insurers sceptically.

The tell is reserve development. Insurers disclose whether prior-year reserves turned out to be too high (favourable development) or too low (adverse development). A pattern of favourable development signals a conservative, trustworthy team. Repeated adverse development is a serious red flag: it means the reported profits of earlier years were partly an illusion.

The investment portfolio

Because the float gets invested, an insurer is also, in effect, an investment fund. Look at what it owns.

• Conservative bond-heavy portfolios suit insurers with fast-paying claims and are lower risk.
• More equity-heavy portfolios can compound faster but add volatility, and are only prudent when the underwriting is rock-solid and reserves are strong.

The danger is an insurer that reaches for yield — buying riskier assets — to paper over weak underwriting. That is borrowing risk twice. A strong insurer earns its returns primarily from underwriting discipline and treats the investment book conservatively.

Applying the Five Criteria to insurers

Our framework needs a few translations here.

• A great business (high returns): rather than ROIC, judge the insurer on sustained growth in book value per share plus dividends, and on return on equity earned without excessive leverage.
• A durable moat: insurance is largely a commodity, so durable advantages are rare and precious. They come from a genuine low-cost position (scale, brand, superior data and underwriting skill), niche expertise rivals cannot match, or distribution others cannot replicate. Test them as you would in how to spot a competitive advantage.
• Aligned management: underwriting discipline is a cultural trait set at the top. A management team that walks away from underpriced business in a soft market — accepting slower growth to protect profitability — is showing you exactly the discipline you want. Judge them through the lens of how to identify great management.
• A sound balance sheet: for insurers this means strong reserves, a prudent investment portfolio, and enough capital to withstand a very bad year (a major catastrophe or market fall) without being forced to raise money.
• A reasonable price: anchored on book value, as below.

Growth is not the goal

In most industries, faster revenue growth is good news. In insurance it is often the opposite. An insurer can grow premiums rapidly simply by cutting prices and writing business its competitors have sensibly rejected. That growth feels great until the claims arrive.

So when you see an insurer growing premiums far faster than its peers, your first question should be sceptical: is this disciplined expansion, or is it buying market share by underpricing risk? The best insurers are willing to shrink in a soft market and grow only when pricing is attractive. Prize that patience — it is the sector’s version of staying within your circle of competence and refusing to overpay for growth.

Valuing an insurer

Because an insurer’s assets and liabilities are mostly financial, book value is a sound anchor, and the key tool is price to book value. A high-quality insurer that consistently grows book value and earns a strong return on equity deserves to trade above book; a troubled or low-return insurer often trades below it.

Combine that with a judgement about the quality and growth of book value over time. Our dedicated guide to price to book value explains how to read the multiple without being fooled by intangibles.

A hypothetical sense-check

Imagine an insurer, Insurer A. Over the past decade its combined ratio has averaged 95%, prior-year reserves have consistently developed favourably, its investment book is conservative, and book value per share has compounded steadily. It trades at 1.3x book. That is the profile of a disciplined compounder.

Now imagine Insurer B, growing premiums rapidly, running a combined ratio flirting with 105%, showing repeated adverse reserve development, and reaching for yield in its portfolio — but trading at just 0.8x book. Insurer B looks cheap and is probably a value trap. (Both are illustrations, not real companies.) When reserves and underwriting are in doubt, a low price-to-book ratio is a warning, not a bargain, which is why a true margin of safety depends on the quality behind the number.

Frequently Asked Questions

What is the combined ratio and what is a good number? The combined ratio adds the loss ratio and the expense ratio. Below 100% means the insurer earns an underwriting profit before any investment income; above 100% means it loses money on underwriting and leans on investment returns. A combined ratio consistently below 100% across good years and bad signals real discipline.

What is insurance float and why does it matter? Float is the pool of premiums an insurer collects before it has to pay claims, which it can invest in the meantime. If underwriting roughly breaks even or better, that float is effectively free — or better than free — leverage, which is why great insurers have long been prized by value investors.

Why do investors focus on book value per share for insurers? Because an insurer’s assets and liabilities are largely financial, book value is a reasonable proxy for intrinsic worth. Steady growth in book value per share, plus dividends, is the clearest long-run measure of how much value the insurer is creating.

What is the biggest risk in an insurance company? Under-reserving and underpricing. An insurer can post strong short-term profits by setting aside too little for future claims or writing underpriced policies, then suffer large losses later when the claims actually arrive. Reserve discipline, visible in favourable reserve development, is everything.

Is life insurance analysed the same way as property-and-casualty insurance? The principles overlap, but life insurers have much longer-dated liabilities and are far more sensitive to interest rates and investment assumptions, so the investment portfolio and actuarial assumptions carry even more weight. The combined-ratio framework applies most cleanly to property-and-casualty insurers.

Your Next Step

Insurers reward sceptical, patient investors who respect reserving discipline and distrust fast growth. To build on this:

• Price to book value — the natural valuation lens for insurers.
• Quality of earnings — to sense when reported profit is being flattered.
• How to identify great management — because underwriting discipline is a leadership trait.

For deeper sector playbooks and worked insurer analysis, see our premium resources.

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About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.

The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.