An update on 'the best business in the world'...
An update on 'the best business in the world'... Warren Buffett's wisdom... Porter's latest win... A brand-new Trophy Asset...
Stansberry's Investment Advisory recommendation Chubb (CB) soared more than 25% yesterday on news of a buyout...
Chubb is a property and casualty ("P&C") insurance company, and the deal marks the sixth major insurance deal announced so far this year.
Longtime readers know Porter believes insurance is the "best business in the world." He has gone so far as to say that if individual investors would invest only in insurance companies and nothing else, they would greatly increase their average annual returns. There isn't another sector of the market where we believe that's true.
But we know many new subscribers may not be familiar with this idea. So before we discuss the details of the deal, we'll quickly review...
Porter and his team explained the "beauty" of insurance in the October 2012 issue of Stansberry's Investment Advisory...
One of our overriding goals at Stansberry Research is to give you the knowledge we'd want to have if our roles were reversed. When it comes to insurance and insurance stocks, we can only beg you to pay close attention. There's a simple reason for this, which everyone can understand, immediately. It's completely intuitive. But I'm pretty sure your broker has never explained it to you...
Insurance is the only business in the world that routinely enjoys a positive cost of capital. In every other business, companies must pay for capital. They borrow through loans. They raise equity (and most pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.
But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually be paid to accept it. Insurance companies are all paid a fee to manage capital. All of them. The best insurance companies make sure the fees they charge for capital are in excess of the risks they accept by extending insurance. These companies actually make a profit on their underwriting. They earn money by taking the capital of their customers. It's incredible. These firms compound their equity by simply opening their doors every morning. They don't have to do anything else. Nothing else in business is like it.
The beauty of insurance is that you can get paid to use capital. That's a fantastic way to become very wealthy. And it's precisely how (along with several great stock picks) Warren Buffett became the world's most successful investor.
As you likely know, Buffett is the multibillionaire CEO of Berkshire Hathaway (BRK). But what you may not know is it's actually the insurance business – specifically the P&C and reinsurance businesses – rather than the stock market that is responsible for much of his billion-dollar fortune.
His "secret" was simple... Buffett discovered that not all insurance companies are created equal. And he taught himself how to identify the best insurance companies better than anyone else in the world.
Fortunately for investors, Buffett shared his wisdom on successful insurance investing in bits and pieces over the years in his annual Berkshire Hathaway shareholder letters.
Porter and the Stansberry's Investment Advisory research team dug through all these letters, and in 2012 used these "Buffett metrics" to create the Stansberry Data Insurance Value Monitor, a proprietary ranking system to separate the world's best insurance companies from all the rest.
This system has helped Porter's team identify companies like Chubb (their No. 1 ranked insurance company)... and also to predict the current rush of consolidation in the industry this year. As they wrote in the January 13 Stansberry Data Insurance Value Monitor update...
We expect a year of consolidation within the P&C and reinsurance sectors.
Increased competition and falling premiums will drive insurers to find other ways to increase revenue and profits... likely in the forms of mergers and acquisitions.
P&C insurers will look to acquire other insurers that allow them to diversify into new insurance lines or regions and markets. We're already seeing this today, and we think it's just the beginning.
Not only were they right about consolidation in the industry... but three of the five companies acquired prior to this week ranked high in their proprietary system. As they noted in Tuesday's update...
Earlier in June, Tokio Marine Holdings of Japan announced it will acquire HCC Insurance (HCC) for $7.5 billion in cash, or $78 per share.
This is the fifth major acquisition announcement of a P&C insurer since last November. And, as you may have noticed, the acquisition targets tend to be companies that are highly rated by the Stansberry Data Insurance Value Monitor. In fact, three of those five targets were ranked in our Top 15 at the times of their acquisition, and all three had previously spent time in our Top 10.
This certainly suggests that industry suitors value the exact same qualities as our proprietary rankings.
Just hours later, that streak jumped to four out of six...
On Wednesday morning, insurer ACE Limited (ACE) agreed to buy Chubb for $28.3 billion in cash. The deal is the largest in the history of the insurance industry and would create one of the biggest P&C companies in the world today.
As we noted, shares jumped nearly 30% on the news yesterday, closing at around $120 per share. Stansberry's Investment Advisory readers are up 61% as of yesterday's close.
Stansberry's Investment Advisory lead analyst Bryan Beach shared his thoughts on the deal with us in a private e-mail this morning...
We've gotten used to seeing some of our favorite P&C and reinsurance companies get swept up in the recent consolidation binge. There are a lot of reasons for all of this consolidation... and we've been writing about them extensively throughout 2015.
For one thing, the P&C and reinsurance worlds are very small. A lot of these companies are based in Bermuda – a small island where everybody knows everybody. It's easier to get deals done when you know the other guy on a personal level. One of our contacts in Bermuda told us months ago to keep an eye out for acquisitions and mergers for midsize companies – say, the $5 billion to $10 billion range – particularly reinsurers.
These guys feel pressure to merge so they can compete for bigger reinsurance contracts. The P&C and reinsurance landscape has changed a lot in the last 10 years, with a lot of hedge-fund money and other alternative capital getting thrown into the mix... so the prevailing thought is that being bigger will help survive in this new environment. The "bigger is better" mentality is debatable... but so far, our contact has been spot on. We've seen a ton of activity in the $5 billion to $10 billion range.
While Porter's team has been all over the consolidation boom, Bryan says he was surprised by this deal...
I have to admit that I didn't see this ACE/Chubb deal coming. Some are calling it the biggest combination in insurance history. These are two massive companies with plenty of size, breadth, and scale. It looks like ACE was looking to increase its presence in the U.S., and Chubb is a huge name throughout North America.
We haven't had a chance to dig into the details yet, but it looks like ACE's management will stay in place, but the company will retain Chubb's name and branding. ACE is paying a big price – $28 billion – but it's getting a great company. Chubb is currently the top-ranked company in the Stansberry Data Insurance Value Monitor.
Their Insurance Value Monitor has been highly accurate... Readers who followed their advice are up an average of 49% so far. But it's actually just one of four proprietary Stansberry Data monitors Porter's team has created to cover his core investment strategies...
They also have monitors to cover capital-efficient companies, the shale oil and gas boom, and companies that own world-class "Trophy Assets" around the world... and they've just discovered a brand-new Trophy Asset for subscribers.
The company owns a hidden gem that Porter and his team say almost no one understands today. They believe it could be worth two to three times the company's current market cap when investors finally figure it out. Stansberry's Investment Advisory subscribers will receive this recommendation in this month's issue, which will be published tomorrow.
They'll also be covering the company in detail in the supplemental Stansberry Data service. Porter calls Stansberry Data the culmination of everything he has learned in his 20 years of investing. It's available to gold-level and higher subscribers to Stansberry's Investment Advisory. To learn more about how to gain access, click here.
New 52-week highs (as of 7/1/15): American Financial Group (AFG), Allied World Assurance (AWH), Chubb (CB), Valero Energy (VLO), and W.R. Berkley (WRB).
In the mailbag, Stansberry Resource Report editor Matt Badiali answers a question about one of the most hated sectors of the market. Send your questions, comments, or complaints to feedback@stansberryresearch.com. Please note that we can't give individual investment advice.
"Guys, can someone... address the extreme move downward of Coal via Peabody Energy please? Is now the time to buy?" – Paid-up subscriber John R.
Badiali comment: The amount of available coal supply is massive and the demand is down. They're closing coal plants left and right in the U.S. right now. Meanwhile, China is reducing its dependency on coal-fired plants because of the amount of air pollution it's causing. So there isn't as much demand as people thought there was going to be.
The other problem with coal is that a big chunk of the market is melting iron ore and turning it into steel. Metallurgical coal has fewer pollutants in it, so you use it to make steel. But the steel market has gotten crushed, too.
We're probably a year or two away, maybe more, from good investments in coal, simply because we need to see more supply go away. (For more on the drivers of cyclical commodities like coal, we urge you to read this classic interview with resource expert Rick Rule in the Stansberry Research Education Center.)
Regards,
Justin Brill
Baltimore, Maryland
July 2, 2015
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