Warren Buffett is one of the most successful investors of all time and one of his favorite sectors of stocks is insurance companies. The reason is simple, as long as the insurance company works well in screening customers, profits will definitely be obtained because in principle they will always try to minimize claims payments and other expenses. But Warren Buffett is also very good at conducting fundamental analysis of insurance companies based on a number of aspects such as:
* Solvent: measures the ability of an insurance company to fulfill its obligations, such as paying customer claims and paying various company expenses, such as salaries and electricity. The solvency value can be measured based on the solvency margin ratio and solvency coverage ratio.
* Capital adequacy: comparing the company’s capital with the risks it owns. Capital adequacy or capital adequacy can be measured using several ratios such as the risk-based capital ratio and the leverage ratio.
* Profit: Calculates revenue minus expenses. To measure it, you can check the amount of profit that has been recorded or make use of a number of ratios such as return on equity (ROE) or return on assets (ROA).
* Underwriting performance: The ability of insurance companies to offer insurance policies at the right price in the sense that they are not expensive for customers and do not create losses for the company in the future. To analyze underwriting performance, you can take advantage of a number of ratios such as the expense ratio and loss ratio.
* Liquidity: The company’s ability to meet short-term obligations is analyzed based on several ratios such as the quick ratio and current ratio.
* Diversification level: Analyzed using a concentration ratio to see which areas the company operates in. In addition, the level of diversification can be seen from how diverse the insurance products are offered to the public. It is hoped that a good insurance company will not focus on one type of insurance product as is done by the Ramayana insurance company which is more focused on property insurance products.
Detect the prospects of insurance companies
To do this, we can see from sales growth and profit growth. As long as the company is able to record an increase in sales and profits every year, it means that the company’s products are quite popular and have the potential to sell more insurance policies in the future, which gives bright prospects.
In addition, national macroeconomic conditions are also very influential. As long as the national economy is growing positively, it is estimated that there will be many people who are interested in buying insurance policies. Conversely, when it is felt that economic conditions will worsen, it is estimated that many people will shift their focus from insurance products.
Characteristics of insurance companies whose shares are not worth buying
The stock world basically compares the value of a company’s equity and earnings to its market capitalization. As long as the company is not able to increase equity and profits, the stock price will naturally fall or at least go sideways. So the characteristics of an insurance company whose shares are not worth buying are companies that are unable to make a profit and their equity value does not grow. Unfortunately insurance companies listed on the IDX are local insurance companies that are somewhat less popular with the public, so don’t be surprised if their market capitalization is relatively small and doesn’t attract many investors to inject their capital.
To analyze an insurance company’s fundamentals, you need to look at several factors, including the company’s financial statements, overall financial condition, and growth prospects in the insurance market. You should also consider factors such as the ratio of assets to liabilities, the ratio of net income to assets and the ratio of net income to equity.
Apart from that, you also need to pay attention to factors such as the company’s financial stability, the quality of the assets owned, and the company’s ability to generate profits consistently. You should also consider factors such as the company’s reputation in the insurance industry, as well as the company’s ability to compete with other insurance companies in the market.
To detect the future prospects of an insurance company, you need to pay attention to several factors, including the general state of the economy, trends in the insurance industry, and current conditions of the insurance market. You should also pay attention to factors such as government policies related to the insurance industry, as well as potential growth or technological developments that may affect the prospects of insurance companies in the future.
There are some characteristics of insurance stock that it may not be necessary to purchase, including insurance company stock that has a high liability-to-asset ratio, or one that has a low net income-to-asset ratio.
Stocks of insurance companies that have a poor reputation in the industry, or that have experienced consistent declines in net income, may also not be worth buying. In addition, stocks of insurance companies that are having financial problems or that do not have promising growth prospects may also not be worth buying.
Basic Fundamental Analysis
The first point that we can see as a quick indicator to assess whether a company is a good company or not is by looking at the return on equity (RoE) indicator. RoE is a ratio that shows how capable a company is of generating income with the amount of existing capital. The answer is of course simple, the greater the RoE ratio, the better the company’s performance.
Another basic fundamental is the value of RBC or “Risk Based Capital”. In the regulatory rules for insurance companies themselves, RBC is an obligation that must be fulfilled. An insurance company is said to be healthy and feasible if it has a minimum RBC value of 120%. This figure can also directly show whether the insurance’s finances are sound and whether the company will be able to pay its customers’ risk claims.
These two things are quick indicators to filter when we compare several insurance companies. And if we do an analysis of the insurance company’s financial statements and the company doesn’t look viable from these two indicators alone, that’s enough reason for us to close the financial statements and not consider the company to buy its shares. The reason, fundamentally, is that the company’s finances are unhealthy. If these two indicators are okay, then we move on to other indicators.
