Understanding the Quality score

Quality for insurance companies

What makes a strong business?

A good business needs more than a good year. The Quality score looks at how well the company uses its money, earns profit and supports its finances.

Customer payments for insurance are called premiums. Claims are the costs of covered damage or losses.

4 parts. One score from 0 to 100.
The score describes the business. It does not tell you whether the shares are cheap.

Using money well 30%Growing income 15%Steady profitability 20%Insurance profits and debt 35%

Quality for insurance companies: illustrated explanation; the same checks are explained below. — Open the full-size image in a new tab.

01 / Read the result

What does the number tell you?

0Lower score

A higher score means stronger results on these checks.

100Higher score

Each part receives points from 0 to 100. The percentages above show how much each part counts. A higher total means stronger results on these checks.

02 / Explore the business

Questions behind the score

The percentages show how much each part counts.

Using money well

How much profit comes from the money invested in the insurer?

30%of the score

A simple example

A 10% annual return means$10 earned for every $100 used

This describes a return in the business, not the return you receive on your shares.

See how the points are calculated

▸Return on capital – 30%: ROIC measures profit relative to invested capital. It counts for more than in standard companies because the model allocates weights differently when the cash-generation component is omitted.

Growing income

Is income growing for each share?

15%of the score

A simple example

Income per share$10 → $11=10% growth

Using an amount per share allows for changes in the number of shares.

See how the points are calculated

▸Business trend – 15%: We examine growth in revenue per share.

Steady profitability

How steadily does a share of income remain as profit after expenses?

20%of the score

A simple example

Profit from each $100 of income$10 · $10 · $10across three years

Steady positive profits are more reassuring than results that swing sharply.

See how the points are calculated

▸Profitability stability – 20%: We examine how steadily a share of revenue remains as profit after all expenses. This share is called the net margin.

Insurance profits and debt

Do customer payments cover claims and running costs? How much of the funding is debt?

35%of the score

A simple example

$100 in customer payments−$95 in claims and costs=$5 left

This is the insurance result before investment income. We also look at how steady it has been.

See how the points are calculated

▸Insurance operations and debt – 35%: We compare claims and expenses with premium income. This is called the combined ratio and counts for 60% of this part. A ratio of 95% means about $95 of every $100 in premiums goes to claims and expenses. The remainder is profit from insurance operations before investment returns. Debt relative to total capital counts for 40% of this part.

Missing figures reduce the information supporting the score and may change how much each remaining check counts. With too little usable information, no score is shown. Read the notes beside the company’s score. A usable return measure is required.

03 / Look a little closer

How we calculate the points

Explore the calculation, the periods used and the information behind the result.

How the checks add up

Insurance companies

Here we emphasise whether insurance operations earn money and how much debt the company carries. The standard cash-generation component is not used in this calculation. This does not mean insurers have no cash flows.

What happens when figures are missing?

A poor result and a missing figure are different things. A poor result lowers its part of the score. When a figure is missing, the other parts may receive more weight. We also show that the assessment is based on less information.

We measure how much of the calculation has usable information. We use the component weights, so a missing measure with a large share matters more. At least 90% normally gives High confidence, 70% to below 90% gives Medium, and 60% to below 70% gives Limited. Confidence can be lower when some figures rely on an alternative calculation.

We do not show an overall Quality score if usable information covers less than 60% of the calculation. We also need a usable return-on-capital measure. Without it, we do not show the score. For a bank, we use the corresponding bank return measure.

A measure that is not used for that business type does not count as missing. For example, we do not assess a bank using the standard free cash flow calculation.