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Several readers have asked us to weigh in on the merits of the yield enhancement that comes from option-writing strategies versus the upside potential of long-only equity positions. Which is better?
No one considers the insurance industry as “sexy.” However, it forms the bedrock of one of the great investment success stories of the last half century, namely Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK.A).
Early in his career, Mr. Buffett recognized the advantages of the insurance business model. Customers paid their premiums up front, and the company had the use of their money, known as the “float,” until such time as it had to pay beneficiaries to fulfil its obligations.
For life insurance companies, which cynical observers have said should be renamed death insurance companies, the mortality of their clients dictates their success. The liabilities can stretch over many decades. Some of the major insurance disasters of the second half of the twentieth century were due to the companies’ actuaries (those are the mathematicians who calculate mortality percentages) vastly underestimating the size of the liabilities from the effects of smoking.
The other danger for insurance companies is using the income from their investments, including the float, to subsidize writing unprofitable policies. The ratio of their expenses to their insurance premiums should be under 100%, so that the company is making money on the business it’s writing. However, especially during the high interest period of the 1970s to the 1990s, when bond yields were between 5% and 10% and equities yielded over 4%, many insurance companies wrote business that lost money and compensated by drawing on their investment income.
This led to what in industry terminology is known as “soft” insurance markets. It became very difficult to raise prices as some participants were happy to write loss-making business to obtain the premiums. As a result, insurance was consistently underpriced relative to the risks being taken.
Eventually, the situation became unsustainable. Natural disasters such as hurricanes, floods, and forest fires occurred more regularly. At the same time, bond yields were on a steady downward path, which meant the investment income generated was falling. Rising costs and falling revenues resulted in companies having to take major writeoffs, and a new insurance writing discipline entered the field.
Of course, some companies had always attempted to maintain their pricing discipline, even at the expense of losing market share. As Warren Buffett has said, writing insurance is an art, not a science, and the successful companies, such as those owned by Berkshire Hathaway, are run by experienced insurance executives who have an innate sense of the dynamics of the market.
As far as Canadian insurers are concerned, after the wave of demutualizations and mergers 25 years ago, Manulife, Sun Life, and Great West Life have been very successful investments. But the Great Financial Crisis of 2008-09 saw major losses, and Manulife had to cut its dividend.
Interestingly, the Property & Casualty (P&C) insurance industry has done even better, despite its exposure to potential unexpected losses from natural and man-made disasters. This is partially due to the much shorter duration of its liabilities, which generally are annual in nature (e.g., auto, housing). This means P&C companies must invest very conservatively. It also imposes a much stronger pricing discipline when writing new policies.
The largest P&C insurer in Canada, Intact Insurance, has always aimed to outperform the industry’s average Return on Equity (RoE) by 5% annually. It has consistently written profitable business to attain this aim. The stock price has quintupled since 2012.
Intact Insurance Corp. (TSX: IFC) is the largest P&C insurer in Canada, with a market share of over 20% after taking over the Canadian operations of U.K. insurer RSA in 2021. The acquisition also extended Intact’s geographical reach to the U.K. and Ireland. RSA’s operations have lower profitability than those in Canada, giving Intact the opportunity of raising margins.
In late 2023, Intact sold its U.K. personal line business (home and pets) to Admiral Insurance for £83 million plus another £33 million in earn-outs. It also bought Direct Line’s brokered commercial platform for approximately £500 million. This meant that 95% of its £2.8 billion in 2024 in U.K. premiums was from commercial lines, with a combined ratio in the low 90% area.
The share price fell to $250 in February on higher catastrophe losses before beginning a strong rise to a new all-time high of $316.97 last week. IFC raised its dividend for the twentieth consecutive year. The increase was 10% to $1.33 per quarter, equivalent to a yield of 1.7%.
In 2024, Intact’s revenue rose 5%, to $23.7 billion, while its combined ratio improved by 200 basis points to 92.2%. Net operating income (NOI) rose 28% to $2.58 billion ($14.43 per share) while net income rose 74% to $2.3 billion ($12.36 per share). Book value per share, usually regarded as the best measure of underlying performance for insurers, rose 13%, to $92.67 per share. Operating return on equity rose 260 basis points, to 16.5%, despite $1.5 billion in catastrophe losses in 2024.
For the first quarter of 2025, revenue rose 3%, to $5.4 billion, with a steady combined ratio of 91.3%. NOI rose 11% to $717 million ($4.01 per share) and net income was flat at $676 million ($3.69/share). Book value per share rose 13% to $96.16.
Long-time CEO Charles Brindamour said the company expects low double-digit premium growth in personal, auto, and property while specialty and commercial lines in Canada, the U.S., and the U.K. were expected to grow by mid-single digits.
Investors looking to add insurance industry exposure to their equity portfolio might consider Intact for its market-leading position, superior return on equity, and geographical reach. As always, consult with your financial advisor to ensure your investment aligns with your financial objectives and tolerance for risk.
Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.
Notes and Disclaimer
Content copyright © 2025 by Gavin Graham. This is an edited version of an article that first appeared in The Internet Wealth Builder newsletter. Used with permission.
The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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