Gaby Lapera: How would we evaluate whether
or not a company is doing well on the investment side of their business model?
Jordan Wathen: If you go to the financial statements and you look at the investments,
I like to look at that especially because you can really find out how much risk they’re
taking. One think they’ll always show is the percentage … Most insurers invest mostly
in bonds, so you look and you can see for example by credit rating, they’ll show percentage
of investments that are held in government securities, percentages that are held in AA
corporate bonds. That gives you a good idea of how risky an insurance company is. There
was one very small insurer that was run by some very interesting people. For a long time
it had a lot of its money invest in gold stocks and gold and silver, which if you think about
it is a pretty terrible way to run an insurance balance sheet, because if at the same time
gold goes down a huge hurricane through, you’re in a world of hurt.
Lapera: That is really interesting. Gold is whole another issue we could do an entire
podcast on. There are definitely issue some gold bugs out there, I think one of my colleagues
called them the other day. Which is crazy because ever since, what’s his name, William
Jennings Bryan I didn’t realize that this was still a thing that people were so obsessed
with. Wathen: Right, yeah. If you ever have some
survivalist friend, your insurance company might want to double think it. That’s one
of the biggest risks, but for the most part most major insurance companies are pretty
plain vanilla in how they invest their money. It’s say 95% fixed income or bonds and 5%
stocks. They’re not interested in taking too much risk on that, because they know a lot
of the money they take in in premiums will have to be paid out in losses and expense
relatively soon. Lapera: Yeah. Okay, here’s a thing right,
is that we’re doing an episode about something that a lot of people think is super boring,
so I asked Jordan Wathen to come up with some fun facts about insurers. I think it might
be time after talking about some very boring bonds, to come up with a fun fact. Do you
want to go for it? Wathen: Yeah. We can go with some fun facts.
Way back in the day … Actually first I should give a shout out to this book which is called
The Invisible Bankers. Actually it was interesting that we talked about insurance companies being
like banks. The book is called, Invisible Bankers, I would highly recommend you read
it. You can get it on Amazon for all of a dollar, so it’s worth checking out. One of
the few of the fun things they had in there was one about in the hay day of air travel,
insurance companies made a fortune selling life insurance to air travelers. They basically
pitched it as this huge risk, that getting on a plane was basically taking a huge risk
with your life. But all the same time, while they’re selling travelers life insurance on
the plane, they’re underwriting pilots at the standard rate. Basically they’re telling
travelers that traveling is so dangerous, but the people who fly for a living, they’re
just standard risks. Lapera: That is super sneaky. Again, why maybe
people think that people who work in financial services are villains. Take note in case you
want to change your perception, insurance companies.