Business Update

Click the below link for musings about the Liberty Mutual-Safeco insurance buyout and the insurance industry in general.

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The insurance industry is and always will be a great place for investors.

Insurance is a non-union bastion. Significant numbers of its workforce are booked off payrolls as 1099 contractors and are not being provided with costly fringe benefits. Insurance companies generate mountains of cash. There’s perpetual demand for insurance products. With the notable political shift to conservatism over the past 20 years (despite the ghastly irony of non-voting conservatives), the industry has obtained landmark court and legislative victories that have reigned in or thrown out leftist decisions from prior decades and largely have shielded it from ruinous litigation.

Liberty Mutual will acquire Safeco. That’s a huge item of news for those who work in and around property & casualty insurance. Liberty automatically becomes a major player on the West coast. The acquisition will provide cost savings and economies of scale. Safeco is an excellent company that was priced cheap and accordingly was owned by various leading value investors, e.g., The Oakmark Funds. That said, however, Liberty overpaid, as so often occurs in buyout scenarios.

This buyout might nudge the industry towards further consolidation. That would benefit shareholders and, despite what you might hear from liberals in the financial media, policyholders too.

The very best industries from the standpoint of customers are oligopolies with small numbers of strong competitors (e.g., office supplies, home improvement, heavy equipment) , as opposed to diffuse industries with overabundances of struggling and cutthroat players (e.g., department store retail, airlines, telecom, electronics). We’d all benefit if the P&C insurance industry was reduced to 3-4 big insurers. With luck that will happen within the next decade.

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P.S. — Here’s a link to the AP’s report of the Liberty-Safeco deal. It’s a decent article — especially by media standards — and is worth a perusal.

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