Insurance is a simple business.
You take in premiums and invest them. Out of this you pay wages, office costs, brokerage and losses. The money you get from the former needs to comfortably exceed the latter - that being the case you get to pay the taxman and then your shareholders.
Don't worry about clever structures. Just get the above business right and everything else will look after itself. If you can be good at more than one line of business you also reap the benefits of diversification.
This is the lesson we learned last week from Dinos Iordanou of Arch when we were lucky enough to catch up with him following the announcement of the United Guaranty Corporation mortgage insurance acquisition from AIG.
It's great when you get a proper interview with a major industry player right at the top of their game. Just listen to Dinos here:
"At the centre of it all you've got to answer the question: is the company capable of providing the underwriting performance and capable of providing the investment performance? Once the answers are yes and yes, don't worry about the structures and don't worry about the product lines either."
Of course, all of this is easier said than done, particularly in a class of business that is so directly tied to the performance of the overall economy. However, there are massive diversification benefits to be had by moving into a clearly non-correlating business line.
While mortgage insurance is correlated to the economic cycle, by and large the rest of Arch's business isn't. As long as Arch's bet on the US economy isn't too big relative to its overall size, it should be fine.
And while mortgage cover might get hit by its equivalent of a catastrophe whenever the economy tanks and property values slump, sound risk management is still possible. The best underwriters will always outperform in a downturn and the US is a very big place, affording huge geographical and employment sector spread to those that are able to access it.
Let's not forget that Arch can also buy reinsurance protection where it needs to manage exposure. If it is sophisticated enough to know its own book in detail it can be very precise in how it manages its downside.
The other fundamental is that betting against the continued long-term robustness of the US economy is a very foolish game.
In the words of Warren Buffett: "It makes no sense to bet against America for long."
Arch has consistently done better than its peers at sticking to simple business principles - and I see no reason why it can't do this in a new line, particularly one on which so much historical data is publicly available and in which a strong underwriting culture hasn't always been evident.
If anyone can make a success of this venture, Arch can. Go for it!
PS. As we revel in the wisdom of one industry leader in his pomp, we repeat our sadness at the loss of Jay Fishman, former CEO of Travelers, who died at the age of 63.
Running a company the size of Travelers is a Herculean task and requires especially strong and insightful management.
Fishman's remarkable career saw him build his firm into that rare animal - a bellwether that consistently manages to outperform its market. His quarterly commentary on the state of US insurance was required reading for all The Insurance Insider team.