P&C (Property and Casualty) Insurance

P&C (Property and Casualty) Insurance (also known as 'Non-Life Insurance') is a type of insurance that protects the things you own and shields you from legal liability. Think of it as a financial safety net for your stuff and your actions. The “Property” side covers physical assets against damage or theft—like your house, your car, or your business's factory. The “Casualty” side, on the other hand, covers your legal responsibility (liability) if you accidentally harm someone else or damage their property. Your car insurance policy is a perfect example: it has a property component (covering damage to your car) and a casualty component (covering injuries or damages you cause to others in an accident). For an investor, a P&C insurance company is a unique business that collects money upfront and hopes to pay out less in claims later, investing the difference for profit.

A well-run P&C insurer makes money in two distinct ways. Understanding both is key to seeing why legendary investors like Warren Buffett have fallen in love with this industry. It’s a business with two powerful profit engines that, when running smoothly, can compound wealth beautifully.

This is the core insurance operation. Insurers collect money from customers in the form of premiums. They then pay out money for accidents and disasters in the form of claims. If the company is skilled at assessing risk, it will collect more in premiums than it pays out in claims and operating expenses. This difference is the underwriting profit. The single most important metric for judging this engine's performance is the Combined Ratio.

• Formula: (Losses from Claims + All Expenses) / Premiums Earned
• What it means:
  1. A ratio below 100% means the company made an underwriting profit. For every dollar of premium it collected, it paid out less than a dollar in costs. This is the gold standard.
  2. A ratio above 100% means the company suffered an underwriting loss. It paid more in claims and expenses than it collected in premiums.

A company that consistently achieves a combined ratio below 100% demonstrates exceptional management discipline and skill.

This is where the real magic happens for investors. P&C insurers collect premiums now for claims they might have to pay later—sometimes many years later. This giant pool of money they hold but don't yet own is called insurance float. Think of float as a massive, interest-free loan from policyholders. The insurer gets to invest this float—in stocks, bonds, and other assets—for its own benefit. If the company can also generate an underwriting profit (a combined ratio under 100%), it means they are actually being paid to hold and invest this money. This is the “secret sauce” that has powered much of the success of Berkshire Hathaway. It’s an enormous competitive advantage, providing a stable, long-term source of capital that other businesses can only dream of.

Value investors are drawn to P&C insurers for their understandable business models and clear performance metrics.

As mentioned, float is the star of the show. A disciplined insurer can use this low-cost (or even negative-cost) capital to build a formidable investment portfolio, compounding shareholder wealth over decades. The larger the float and the lower the combined ratio, the more powerful this effect becomes.

The Combined Ratio acts as a transparent scorecard for management's underwriting ability. By analyzing the ratio over many years (to smooth out the impact of one-off catastrophes), an investor can quickly tell if management is disciplined and prioritizes profitability over reckless growth.

For many P&C companies, the Price-to-Book (P/B) Ratio is a handy valuation starting point. A large portion of an insurer's “book value” consists of its investment portfolio (the float at work). While not a perfect measure of intrinsic value, the P/B ratio can give you a quick sense of whether the company is trading at a reasonable price relative to its net assets.

Investing in P&C insurers isn't without its pitfalls. The industry is exposed to significant and sometimes unpredictable risks.

• Catastrophes (“Cats”): A single major hurricane, earthquake, or flood can wipe out a year's worth of profits, or even more. This makes earnings lumpy and unpredictable. Well-managed insurers protect themselves from ruin by purchasing reinsurance (essentially, insurance for insurance companies).
• “Dumb” Competition: The desire to grow can lead some insurers to slash their premium prices to irrational levels just to gain market share. This can lead to industry-wide underwriting losses. A smart investor looks for companies that are willing to shrink their business rather than write unprofitable policies.
• Reserving for the Unknown: Insurers have to estimate how much they'll need for future claims and set aside money in loss reserves. This involves a lot of judgment. If a company consistently underestimates its future losses, its past “profits” were illusory, and that pain will eventually surface on its financial statements.