I recently had the opportunity to ask the director of corporate finance a few questions. As a Harvard graduate who worked in equity research (covering insurance companies) before joining Argo, he kindly gave me insight on how he views the field. Below is a snippet of his reply when I asked him what he thought made insurance a unique industry to work in.
“From a finance standpoint, insurance is a very difficult industry to understand. If you think of other industries, you have revenues and expenses, both of which are pretty easy to quantify, keep track of, and budget for. When you look at the insurance industry, you collect premium, which is a known quantity, but you don’t have a costs of good sold (COGS). Because if you think, 30 years ago everybody who worked in commercial policy had no idea that there was going to be asbestos. They never expected that they would be paying a multiple of what they collected in premium for a risk that never could have been foreseen. So it is a very difficult industry in that regard, difficult for people to make money. Therefore, I think it’s the most unique industry, and understanding it means seeing things through a different lens.
Every time a company reports its earnings, those aren’t real earnings. They could have reported earnings for five, six years and then realized they didn’t make a penny. So how do you invest in a company like that? I think it requires a much more macro view of the environment. On top of that, insurance is a very cyclical industry. If you look at the history, the whole market has made money for a number of years and has lost money for a number of years. So there are a lot of lags in the industry.
Also, insurance is an industry that’s primed for a lot of change. The people who are in it typically are not risk takers, are not the people who are incentivized to innovate. So now we’re in an interesting time in history where technology is being introduced into all aspects of a lot of different industries - namely, disruptive technology. Everybody in the insurance industry realizes that they need to incorporate it, but nobody really knows how. And so far that reason, it’s an interesting industry to be in.”
