Category Archives: Insurance

Food, Insurance, Mortality

[VIC – 126] Musing on mortality ☠️

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Business & Money

I wrote in VIC 112 about why I love the insurance business. As such, I am always keeping my eyes peeled for new investment opportunities within this vertical. I recently stumbled upon Trupanion (TRUP), a pet insurer, and it’s got me giddy for a whole host of reasons!

First off, it’s basically a technology company masquerading as an insurance company. They’ve built a software platform that integrates directly into the practice management software of veterinary hospitals so that they can pay claims in under 5 minutes (while most of the industry uses a reimbursement model that requires the pet owner to pay out of pocket and later file a claim). Further, it appears that Trupanion collects a greater volume and far more granular data than traditional pet insurance companies. That means they are in a better position to deploy machine learning to better price insurance policies across different breeds of dogs and cats.

Second, I love how management thinks about the business model. Like a SAAS software company, they have created “a business model based on monthly recurring revenue,” as opposed to many traditional insurance companies that focus on float and capital allocation. Recurring revenue provides great predictability for companies and peace of mind for investors.

Third, the addressable market appears massive. Trupanion focuses on North America, where all of the research I can find puts market penetration for pet insurance at less than 2%. That’s in contrast to western Europe where I’ve seen estimates as high as 25% penetration.

There’s a lot to like about Trupanion!

Human Progress

There’s this saying that “everyone wants to go to heaven, but no one wants to die” (I’m not sure who said it). In other words, people want to reach the destination, but aren’t willing to make the journey.

There are also schools of thought (e.g. stoicism) that preach a constant awareness of one’s own mortality. They posit that an acute awareness of death encourages one to be present in each moment and live the best life.

In either case, or any other for that matter, death has been front and center in many (perhaps most) cultures/religions/philosophies for millennia.

But we’ve reached an interesting moment in time wherein it’s up for debate whether death is, in fact, a certainty as it has always been thought (putting aside reincarnation and things like that).

For example, there’s mounting evidence that caloric restriction has the effect of extending lifespan in many different types of organisms.

There are also certain genes that when inhibited or overexpressed in organisms can double or triple life spans, such as the overexpression of tkr-1 in C. elegans (a type of roundworm).

Then you have blood transfusions where you exchange young blood into older animals, with the effect of increasing the rejuvenating capacity of older animals to, for example, repair a damaged liver or increase neuroplasticity.

Finally, there are a couple FDA approved drugs, namely rapamycin and metformin, that have been shown to increase lifespan by up to 30% in a variety of different creatures.

It’s easy to dismiss these things as science fiction, but the evidence is real that there a number of things that can modify the pace at which different types of organisms, mammals included, age.

Philosophy

Now, extending lifespan seems like a great thing, assuming that we can maintain good health and a high quality of life during the extended period.

But there are also tons of second-order effects that we need to consider, such as overpopulation, energy consumption, climate change, health care costs, etc.

But more interesting to think about, for me at least, are the social, ethical and philosophical implications.

We seem to be in a time of rising income disparities and less social mobility. So if someone is born poor, would a lifespan that’s twice as long give them a better shot at upward mobility, or simply lock them in a disadvantaged situation for longer?

What about power structures and societal norms. If people lived for 200 years, how much longer might slavery have persisted? Might it have taken longer for women to secure the right to vote?

If you think about Thomas Kune’s definition of paradigm shifts, scientific progress itself might even be at risk. “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with [the new paradigm].”

Or you might even think about this from a personal perspective. If your forties technically lasted 30 years instead of the normal 10, how might you live your life differently? Would you have children earlier or later? What about marriage? Do you stay single longer? Or perhaps have multiple families sequentially?

Tons of questions here and not a lot of answers. But one thing’s for certain: this conversation is as philosophical and ethical, as it is scientific.

My Latest Discovery

On a lighter note, the brisket burrito at Flats Fix Taqueria in Union Square is 🔥🔥🔥!!!

Do yourself a favor and get one!

Insurance

[VIC – 112] Insurance

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Business & Money

One of the things you never think about as a child is insurance. You get sick, you go to the doctor, take some medicine, and (hopefully) get better. Mom gets in a fender bender and somehow the scratches and dents miraculously disappear within a couple weeks. No matter what happens, things just seem to resolve themselves.

Then you become an adult and everything changes.

At work, most get health, dental and vision insurance as part of their employment benefits. And you have to make choices and elections as to what level of coverage makes sense for you and your family.

At home, you then need to seek out insurance for your home, apartment, car, engagement rings, pets, and many other things.

The interesting thing here is that most of these things are just thought of as necessary expenses. It makes sense to pay some nominal amount every month or quarter in order to mitigate risk and protect the things that matter.

But insurance also offers a great investment opportunity, for long-term buy-and-hold investors that is. That’s because they generate money known as “float” in that they collect premiums in advance of when any claims will be paid out. For example, you pay car insurance every month, regardless of whether or not you get in any accidents. Then one day an accident does happen, at which point you file a claim with your insurance company so they can cover the cost. So, during that entire period before the accident occurred, your insurance company can use the revenue generated from your monthly premiums as investable capital. Most of that money usually get’s invested in low-risk fixed income securities (like bonds), but it’s also used to invest in the stock market.

Taking a real life example, Warren Buffet’s Berkshire Hathaway generated nearly $100 billion in float last year, up from about $40 million in 1970.

What’s more, the best insurance companies will also generate consistent underwriting profits. That is, say a company generates $100 in premiums. It might pay out $70 in insurance losses (claims paid), $20 in general administrative expenses (everyday business operations), and is thus left with $10 of underwriting profit. If you can spot insurance businesses that generate consistent underwriting profits, you’re likely looking at a winner.

Berkshire is probably the best and most obvious choice to own in this category. They generate massive float, consistent underwriting profits, and the business has incredibly financial strength.

However, there are also other mid-cap and smaller-cap opportunities that I’d say are also worth a look. RLI and MKL are two I follow closely.

Ps whenever I find interesting business models, my thought process is to look for other markets where a similar structure might work. In thinking about float and insurance companies, wedding registry sites came to mind. For example, we used Zola for our wedding registry. You set up the registry months before the wedding, but you usually don’t want the gifts shipped until after the wedding date (many people move into a new house/apartment after getting married). So Zola might have something like 3-6 months of “float” in the sense that your wedding guests are all paying for the gifts well in advance of when those orders need to be fulfilled. Zola could, in theory, use that capital to make investments. As a startup, they’re likely using the money to fund growth (advertising, hiring, etc), but once the business reaches scale, perhaps they’ll follow the insurance model.