How Insurance Companies Die

If you’re curious, follow the news about Tower Group. Here’s David Merkel’s take:

As an analyst of insurance stocks, I was always skeptical of Tower Group for three reasons:

  1. The acquisitive nature of Tower Group.
  2. The rapid growth in premiums, 52% per year over the last 10 years — no insurance company can successfully grow that rapidly in a mature market.
  3. Odd reinsurance agreements that made me wonder.

The easiest way to grow an insurance company is to pretend your insurance policies cost less than they do, which is easier to pull off at the pointy end of the insurance market where all the strange coverages and specialty products are. In these lines, management uses a lot more judgment when picking reserve development and pricing factors. There isn’t enough data for actuaries to get a real firm grip on things.

As I understand it, this is where the pain in Tower Group is being felt. Management undoubtedly knew it was pushing things too hard, trying to grow its way out of its past problems. And you can do this for a long, long time at an insurance company. Years. Merkel’s comments above were made almost 10 years ago. And he was right. Yet that insight yielded no profitable investment opportunities, as he rightly saw. 

But like all downward spirals, it’s harder to get out the longer you’ve been doing it.

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