Net Written Premiums

Net Written Premiums is the lifeblood of an insurance company's revenue. Think of it as the total amount of money a customer pays for an insurance policy (the premium), but with a crucial twist. First, “written” simply refers to the total value of all policies an insurer has agreed to underwrite in a given period, whether or not the cash has hit the bank account yet. The most important word here, however, is “net.” Insurance companies are in the business of managing massive risks, and sometimes a single risk (like a major earthquake) is too big to handle alone. So, they buy insurance for their insurance! This is a practice known as reinsurance. Net Written Premiums is the total premium the company wrote on its books, minus the portion it paid to reinsurers to share the burden. In short, it’s the revenue an insurer keeps for the risks it has decided to bear itself.

Let’s make this simple. Imagine you open a local insurance shop, “SafeBet Insurance.” You sell one big policy to a factory owner for a premium of €1 million. Your Gross Written Premiums (GWP) is now €1 million. That's the total premium you've written. However, you're a bit nervous. If that factory burns down, the €1 million claim could wipe you out. So, you call a giant global insurer, “Mega-Re,” and pay them €300,000 to take on 30% of the risk. This €300,000 payment is called Premiums Ceded. It’s the premium you’ve passed along, or “ceded,” to another company. Your Net Written Premiums (NWP) is what's left over: NWP = Gross Written Premiums - Premiums Ceded NWP = €1,000,000 - €300,000 = €700,000 This €700,000 is your real top-line revenue. It's the amount you are responsible for and the pool of money you’ll use to pay for your 70% share of any potential claims. It represents the true size of the business you've decided to run.

For a typical company, you look at sales. For an insurer, Net Written Premiums is one of the first numbers you should check. It’s a powerful indicator of the company's health, strategy, and, most importantly for a value investor, its potential to generate long-term wealth.

Consistent growth in Net Written Premiums is a fantastic sign. It suggests the company is attracting new customers, has the power to raise prices without scaring everyone away, or is successfully expanding its business. It’s a direct measure of its slice of the market pie. However, a savvy investor is always cautious of growth for growth's sake. An insurer could foolishly slash its prices to write more policies, boosting its NWP. This looks great for a quarter or two, but it’s a recipe for disaster, as future claims will likely overwhelm the cheap premiums collected. The key is to look for profitable growth. Always check NWP alongside the company's underwriting profit or, even better, its combined ratio. If NWP is growing and the combined ratio remains comfortably below 100%, you may be looking at a disciplined, well-run machine.

Here’s where the magic happens, a concept mastered by Warren Buffett. Insurance companies have a unique advantage: they collect premiums today for claims they might pay out months or even years in the future. This creates a massive pool of cash that doesn't belong to them but which they get to invest for their own profit. This is the legendary insurance float. A larger Net Written Premium figure generally leads to a larger float. The more premiums an insurer retains, the bigger its investment portfolio can be. For a great insurer, this is a double-whammy of moneymaking:

1. Profit from its core business of underwriting (if it’s good at assessing risk).
2. Profit from investing the float in stocks, bonds, and other assets.

This float is essentially an interest-free loan from policyholders, and it's the secret sauce that makes insurance one of the most powerful business models in the world when managed correctly.

The difference between Gross and Net Written Premiums tells a story about a company's risk appetite. By analyzing the ratio of ceded premiums to gross premiums, you can get a feel for its strategy.

• A small gap (low reinsurance): Suggests the company is confident in its underwriting models and is willing to retain most of the risk and potential profit itself.
• A large gap (high reinsurance): Suggests a more conservative strategy. This isn't inherently bad—it could be a prudent way to manage exposure to catastrophes (like hurricanes) or a smart move when entering a new, unfamiliar market.

As an investor, your job is to ask why. Is the company's reliance on reinsurance a sign of caution and wisdom, or is it a sign that it lacks confidence in its own ability to price risk?

When you see “Net Written Premiums” in an annual report, don't just skim past it. Use this checklist to dig deeper:

• Growth Trend: Is the NWP growing steadily year after year? How does its growth rate compare to its closest competitors?
• Profitability Check: Is the growth profitable? Compare the NWP trend to the company’s combined ratio. A falling combined ratio alongside rising NWP is the gold standard.
• Reinsurance Strategy: What percentage of gross premiums is the company ceding to reinsurers? Has this percentage changed dramatically recently? If so, find out why. Management should explain any major shifts in strategy.
• Fueling the Float: How is the company using the float generated from these premiums? Look at the investment income section of the financial statements to see if they are good capital allocators.