Imagine you own a small shop that sells one thing: financial umbrellas. When a customer fears a “financial rainstorm” (like a car accident or a house fire), they pay you a fee—a premium—to buy an umbrella. This umbrella is an insurance policy that promises to cover their costs if the storm hits. Net Premiums Written (NPW) is essentially your shop's total sales for the year, with one important twist. Let's break it down:
Net Premiums Written is what's left over. It's your Gross Premiums Written minus the premiums you paid to reinsurers. `Gross Premiums Written - Premiums Ceded to Reinsurers = Net Premiums Written` NPW represents the total revenue for the actual amount of risk your company has decided to keep on its own books. It's the true measure of the business you are responsible for.
“The business of insurance is simple: you take in premiums and you pay out claims. The trick is to take in more than you pay out. It's a business of assessing risk.” - Warren Buffett (paraphrased)
For a value investor, looking at an insurance company is less about predicting stock market trends and more about evaluating the skill of the managers as risk assessors. NPW is a critical piece of that puzzle, but not for the reason most people think. It's not just about growth; it's about the quality of that growth. 1. The Engine of Float: This is the magic of insurance and the core of Berkshire Hathaway's success. Insurers collect premiums today but might not pay claims for months or even years. This pool of money they hold in the meantime is called float. They can invest this float for their own profit. Healthy growth in NPW directly translates to a growing pile of float. A value investor sees a company with consistently growing NPW not just as a growing insurer, but as a growing investment vehicle fueled by other people's money. 2. A Barometer of Underwriting Discipline: This is where the value investing lens is essential. Anyone can grow NPW—just offer car insurance for $1 per year! You'd have billions in premiums written, but you'd go broke from the claims. A value investor scrutinizes NPW growth to see if it's disciplined. Is the company writing new policies at profitable rates, or are they recklessly chasing market share by underpricing risk? Fast NPW growth coupled with a worsening combined_ratio (above 100%) is a massive red flag. It tells you management is sacrificing its margin_of_safety for meaningless top-line growth. Conversely, a company that shrinks its NPW during a “soft” market (when prices are irrationally low) is often a sign of excellent, rational management. 3. Gauging Competitive Position: Consistent, profitable growth in NPW over many years can signal a strong competitive moat. The company might have a trusted brand (like GEICO), a low-cost advantage, or specialized expertise in a niche market (like insuring satellites). A value investor looks for this long-term stability in NPW as evidence of an enduring business, not just a company riding a temporary wave of high prices.
The calculation itself is straightforward and found directly on an insurer's income statement (or in its statutory filings). `Gross Premiums Written (GPW)` ` - The total premiums on all policies the company sold.` `Less: Premiums Ceded to Reinsurers` ` - The amount the company paid to other insurers to offload some of its risk.` `= Net Premiums Written (NPW)` ` - The premiums corresponding to the risk the company keeps for itself.`
The raw number for NPW tells you little. The real insight comes from context and comparison.
Here’s how to combine them:
| Scenario | NPW Growth | Combined Ratio | Value Investor's Interpretation |
|---|---|---|---|
| The Disciplined Compounder | Steady (e.g., +5-10% annually) | Consistently < 100% | Excellent. Management is growing the business profitably. This is the ideal scenario, creating value and growing the investment float. |
| The Reckless Gambler | Rapid (e.g., +30% annually) | Deteriorating (e.g., 98% → 105% → 110%) | Danger! Management is chasing market share at any cost, writing bad business. This destroys value and is unsustainable. Avoid. |
| The Disciplined Shrinker | Negative (e.g., -5% annually) | Stable and < 100% | Potentially very good. In an irrational market where competitors are slashing prices, this shows management has the discipline to walk away from unprofitable business. This protects the margin_of_safety. |
| The Stagnant Operator | Flat (0% growth) | Consistently > 100% | Poor. The company is not growing and is consistently losing money on its underwriting. A sign of a weak or failing business. |
Let's compare two fictional property & casualty insurers over three years: “Fortress Insurance Co.” and “Momentum Mutual.”
| Company | Year | Net Premiums Written | Combined Ratio | Underwriting Profit/Loss |
|---|---|---|---|---|
| Fortress Insurance | 2021 | $1,000 million | 97% | +$30 million |
| Fortress Insurance | 2022 | $1,050 million (+5%) | 96% | +$42 million |
| Fortress Insurance | 2023 | $1,100 million (+4.8%) | 97% | +$33 million |
| — | — | — | — | — |
| Momentum Mutual | 2021 | $1,000 million | 99% | +$10 million |
| Momentum Mutual | 2022 | $1,300 million (+30%) | 105% | -$65 million |
| Momentum Mutual | 2023 | $1,700 million (+31%) | 112% | -$204 million |
An undisciplined analyst might be impressed by Momentum Mutual's explosive NPW growth. They are rapidly gaining market share! But a value investor sees the full picture. Fortress is the superior business. They are growing at a steady, deliberate pace while maintaining strict underwriting discipline, consistently generating a profit from their core business. Their float is growing, and it's backed by profitable operations. Momentum Mutual is a ticking time bomb. To achieve their spectacular growth, they have clearly been writing policies at a loss. They are “buying” revenue. While their float is growing rapidly, it's “low-quality” float generated by a money-losing operation. Sooner or later, the massive losses will catch up to them, potentially leading to insolvency. A value investor would avoid Momentum Mutual at any price.