Net Premiums Written

• The Bottom Line: Net Premiums Written (NPW) is the core revenue for an insurance company—it's the money it collects and keeps for the risks it agrees to cover, serving as the primary fuel for its profit engine.
• Key Takeaways:
• What it is: The total premiums from all policies sold (“written”) during a period, minus the portion paid to other insurers for reinsurance.
• Why it matters: It reveals an insurer's growth and market position. Crucially, for a value investor, it's the source of the all-important float, the investable cash that supercharges returns.
• How to use it: Never look at it in isolation. Always analyze its growth rate alongside the combined_ratio to judge whether the growth is profitable and disciplined.

Imagine you own a small shop that sells one thing: financial umbrellas. When a customer fears a “financial rainstorm” (like a car accident or a house fire), they pay you a fee—a premium—to buy an umbrella. This umbrella is an insurance policy that promises to cover their costs if the storm hits. Net Premiums Written (NPW) is essentially your shop's total sales for the year, with one important twist. Let's break it down:

• Premiums Written: This is the total value of all the “umbrellas” (policies) you sold this year. If you sold 1,000 car insurance policies at $1,200 each, your Gross Premiums Written would be $1.2 million. This is your top-line revenue, similar to “Total Sales” for a regular company. It's called “written” because the policy is officially written down and in force, even if you haven't “earned” all the money yet. ¹⁾
• The “Net” Part (Reinsurance): Now, imagine someone asks you to insure a brand-new skyscraper for $1 billion. If a fire destroys it, that payout would bankrupt your small shop! It's too much risk. So, you wisely decide to keep only $10 million of that risk yourself and pay a larger insurance company (a reinsurer) to take on the other $990 million. The premium you pay to this larger company is called “ceded premium” because you are “ceding,” or giving away, that portion of the risk and the associated revenue.

Net Premiums Written is what's left over. It's your Gross Premiums Written minus the premiums you paid to reinsurers. `Gross Premiums Written - Premiums Ceded to Reinsurers = Net Premiums Written` NPW represents the total revenue for the actual amount of risk your company has decided to keep on its own books. It's the true measure of the business you are responsible for.

“The business of insurance is simple: you take in premiums and you pay out claims. The trick is to take in more than you pay out. It's a business of assessing risk.” - Warren Buffett (paraphrased)

For a value investor, looking at an insurance company is less about predicting stock market trends and more about evaluating the skill of the managers as risk assessors. NPW is a critical piece of that puzzle, but not for the reason most people think. It's not just about growth; it's about the quality of that growth. 1. The Engine of Float: This is the magic of insurance and the core of Berkshire Hathaway's success. Insurers collect premiums today but might not pay claims for months or even years. This pool of money they hold in the meantime is called float. They can invest this float for their own profit. Healthy growth in NPW directly translates to a growing pile of float. A value investor sees a company with consistently growing NPW not just as a growing insurer, but as a growing investment vehicle fueled by other people's money. 2. A Barometer of Underwriting Discipline: This is where the value investing lens is essential. Anyone can grow NPW—just offer car insurance for $1 per year! You'd have billions in premiums written, but you'd go broke from the claims. A value investor scrutinizes NPW growth to see if it's disciplined. Is the company writing new policies at profitable rates, or are they recklessly chasing market share by underpricing risk? Fast NPW growth coupled with a worsening combined_ratio (above 100%) is a massive red flag. It tells you management is sacrificing its margin_of_safety for meaningless top-line growth. Conversely, a company that shrinks its NPW during a “soft” market (when prices are irrationally low) is often a sign of excellent, rational management. 3. Gauging Competitive Position: Consistent, profitable growth in NPW over many years can signal a strong competitive moat. The company might have a trusted brand (like GEICO), a low-cost advantage, or specialized expertise in a niche market (like insuring satellites). A value investor looks for this long-term stability in NPW as evidence of an enduring business, not just a company riding a temporary wave of high prices.

The calculation itself is straightforward and found directly on an insurer's income statement (or in its statutory filings). `Gross Premiums Written (GPW)` ` - The total premiums on all policies the company sold.` `Less: Premiums Ceded to Reinsurers` ` - The amount the company paid to other insurers to offload some of its risk.` `= Net Premiums Written (NPW)` ` - The premiums corresponding to the risk the company keeps for itself.`

The raw number for NPW tells you little. The real insight comes from context and comparison.

• Trend Analysis is Everything: Don't look at a single quarter or year. Plot the NPW over the last 5 to 10 years. Is the growth steady and consistent? Is it erratic and volatile? Is it shrinking? A steady upward trend is desirable, but only if it's profitable.
• The Profitability Litmus Test: This is the golden rule for analyzing any insurer. Always view NPW alongside the combined_ratio. The combined ratio measures total insurance expenses (claims + costs) as a percentage of earned premiums.
  • Combined Ratio < 100%: The company is making a profit from its core insurance operations (an underwriting_profit).
  • Combined Ratio > 100%: The company is losing money on its insurance operations.

Here’s how to combine them:

Let's compare two fictional property & casualty insurers over three years: “Fortress Insurance Co.” and “Momentum Mutual.”

An undisciplined analyst might be impressed by Momentum Mutual's explosive NPW growth. They are rapidly gaining market share! But a value investor sees the full picture. Fortress is the superior business. They are growing at a steady, deliberate pace while maintaining strict underwriting discipline, consistently generating a profit from their core business. Their float is growing, and it's backed by profitable operations. Momentum Mutual is a ticking time bomb. To achieve their spectacular growth, they have clearly been writing policies at a loss. They are “buying” revenue. While their float is growing rapidly, it's “low-quality” float generated by a money-losing operation. Sooner or later, the massive losses will catch up to them, potentially leading to insolvency. A value investor would avoid Momentum Mutual at any price.

• Top-Line Growth Indicator: NPW is the clearest and most direct measure of an insurer's growth in its primary business lines.
• Market Share Proxy: Comparing a company's NPW growth to the overall industry's growth shows whether it is gaining or losing market share.
• Fuel for the Float Engine: It is the direct input for creating float, the key source of value for many of the world's best insurance companies.

• The Growth Trap: This is the single biggest pitfall. Viewing NPW growth as an inherent positive is a mistake. Unprofitable growth destroys shareholder value. It is utterly meaningless without the context of the combined_ratio.
• Doesn't Reflect Profitability: NPW is a revenue metric, not a profit metric. A company can have billions in NPW and still be deeply unprofitable.
• Timing Mismatches: Because premiums are “written” upfront but “earned” over time, a fast-growing company's NPW can look very different from its earned_premium in a given quarter, which can sometimes distort other ratios. It's a measure of new business sold, not current period revenue.

• combined_ratio
• float
• underwriting_profit
• loss_ratio
• earned_premium
• reinsurance
• margin_of_safety
• book_value