Can investors do better than simply picking the best cycle-timing stocks? In a word, yes. More on that later, but let’s  first  pay  the  appropriate  homage  to  insurance executives who position their companies to time the cycle well. That is, managers of companies whose reserves are strong, operating leverage is low, credit ratings are healthy, and IT systems are primed to absorb a greater flow of data. In short, their companies are piles of leverageable capital waiting for the right opportunity.

And therein lies the good news. As the pricing cycle gradually firms and the economic recovery gains momentum, cycle-timers could see premium growth rates in the upper single-digits (or higher) if rate increases reach the mid single-digit range 1. Moreover, after years of being highly skeptical, in fact punishing any insurer that surprised positively on growth; investors once again appear to view growth as good (on balance anyway). According to a recent investor survey by Morgan Stanley, 63% of respondents selected organic growth as the best use of excess capital 2.

The pricing cycle trade will probably continue to lift all boats, at least for a while longer. More interesting  times  will  come  when  subtler  differences  in  (re)insurer’s  offensive  capabilities  come   to the forefront. Companies with nagging reserving issues, or those experiencing greater rating agency scrutiny are less likely to enjoy multiple expansion and the increased financial flexibility that materializes when operational and financial strength meet a pricing tail wind.

But if growth is truly rewarded at this point in the cycle, investors might also ask about an exposure tail wind? Is there such a thing? In our experience, management teams ready to really move the ball down the field need to carefully evaluate the changing U.S. economy and consider how they can both find and profit from those pockets of the economy forecasted to exceed the low single-digit overall rate of GDP growth. In so doing, managers can create alpha above and beyond merely timing the cycle adequately.

Healthcare presents an interesting case study in the particulars of researching a growth opportunity. That healthcare is growing offers no particular insight. Questions of where it is growing, in what lines of insurance and in what particular classes of business – those are the more interesting questions that insurers must answer to exploit opportunities.

Cagney Research Group has partnered with Assured Research and with a market intelligence firm – MarketStance – to both find and understand the nuances of the insurance opportunities within this growing segment of the economy.

We then take the process a step further; exploring the public filings and presentations of (re)insurers to gauge their current interest in, exposure to, and competitive positioning for growth in this dynamic segment of the economy. Of course, this is but one component of a fully engaged research effort to discern a company’s  exposure  to  healthcare  (or  any  other   sector of interest). Channel checking with competitors and distributors, and full exploitation of annual statement filings would be part of a broader process. In that regard, the attached power point presentation can be taken not as an end in and of itself, but rather illustrative of one element of a research and analytical process.

There are important observations from this work, however, and we share some of them here along with others discussed in the attached (click Healthcare Premium Analysis ) for the power point document:

• At its broadest level of segmentation, healthcare ranks squarely in the middle when industries are ranked by size of commercial premiums. At a slightly more granular level, however, healthcare ranks in the 85th percentile on both size and growth prospects 3.
• Workers’  compensation  ranks  as  the  top  insurance  line  in this segment of the economy representing some 45% of the total healthcare premiums. Liability premiums are next at 22%. An insurer could probably make headway in healthcare without  offering  workers’   compensation, but tactically, shunning the line could be a competitive disadvantage.
• Small employers (less than 50 employees) comprise about one-third of healthcare premiums. A BOP-oriented insurer is swimming in a much smaller pond if it enters the healthcare space without expanding its underwriting guidelines.
• Among public traded companies, Chartis and CNA appear to be the most overtly active in the healthcare space. In theory, with healthcare premiums representing about 5% of the commercial marketplace opportunity at the two-digit NAICS level, any amount north  of  that  threshold  makes  a  company  ‘overweight’  in  the  space. By that measure, CNA appears to be clearly overweight in healthcare.
• Among hybrid (re)insurers, Arch and Allied World both appear to be appreciably overweight in healthcare.
• Among reinsurers, specialty insurers, and regional companies, no one insurer stands out as a candidate for being noticeably overweight in the space (A&H premiums at Houston Casualty aside), but WRB has clearly planted a flag in the segment with its Medical Excess unit (among other business units with healthcare exposure).
• Among privately held insurers, Ironshore has established IronHealth as one of its principal businesses. Quantifying the  company’s overall allocation to healthcare would involve legwork beyond the reach of public filings.