Friday File: Mailbag! Little Insurance Stocks, Gold Royalties, Covered Call ETFs and more…

This week I’ve written quite a bit of new commentary for the Irregulars, including coverage of my transactions earlier in the week in that Wednesday File, so today I’m focusing on a small pile of reader questions that have piled up… let’s get right to it:

I am just looking at HRTG Heritage Insurance Holdings, Inc. – a P&C insurance company – just bringing this to your attention. Super small and super regional – they say they use technology, net combined ratio of 84.5% from 94.0% in the prior year quarter. They are almost +100% YTD and a MCAP of 700m.

What do you think ? Is there more potential ?

There has certainly been fantastic growth for Heritage Insurance (HRTG) recently, and they have a good narrative about their strategy of fixing the company over the past couple years by shrinking the underwriting (getting rid of unprofitable policies), which they expect will now lead to profitable growth following the reset (something that has started to happen in the last couple quarters). So the focus now, they say, is on profitability and predictable growth. They call themselves a “super-regional” property insurer, both commercial and residential (lots of apartment buildings), and they are focused on the Northeast, California and Florida, with also a subsidiary in Hawaii that only writes in that state, so they do write catastrophe-exposed coverage, and have losses during catastrophes, but they also use a lot of reinsurance and the losses have been manageable, with the company being profitable for a couple years now after a disastrous 2022.

What we want generally is growth in book value per share over time, good float that can generate investment returns, a combined ratio that’s consistently under 100, preferably in the low 90s or better depending on the kind of policies they write (an occasional catastrophe loss year is not ideal, but might be acceptable — some companies can’t avoid that if they write in disaster prone areas), with growing premiums written over long periods of time (though not necessarily every year, since it’s wise to not write policies when competition makes them unprofitable). And, of course, we want to buy it at a decent price — either a reasonable multiple of book value, or a meaningful discount to book value + float (at least 25%), or, in some cases, a reasonable multiple on earnings if they have shown …