Big, Safe Gains From the World's Best Business

Stansberry Research founder Porter Stansberry has called it the one business he'll teach his kids to invest in...

We're talking about property and casualty ("P&C") insurance.

Property insurance addresses the risk of property damage – things like auto insurance and fire insurance. And casualty insurance covers the risk of incurring liability damages caused by the insured person's negligence, such as medical malpractice.

We covered this theme earlier this year when we looked at Travelers (TRV).

So, why is P&C insurance the best business in the world?

It all comes down to cost of capital. P&C insurers are the only companies that enjoy a positive cost of capital. In every other business, companies must pay for capital.

They do this through superior underwriting.

Underwriting is a company's ability to accurately forecast and price risk. To be successful, insurance companies must consistently collect more in premiums than they pay out in claims.

In other words, these companies consistently make a profit on their underwriting.

With P&C insurance, the number of claims – and their amounts – may be hard to predict. And they are paid out much later in the future, if they are paid at all (for example, an auto accident or a medical-malpractice lawsuit). The best P&C insurers can accurately estimate what they'll have to spend on claims... And they only accept business that adequately compensates them for the risk.

Another key part of P&C insurance is float.

Float is the premiums collected by insurance companies that haven't yet been paid out in claims. While it holds these premiums, the company gets to invest the money.

Even after the insurer pays it out in claims, it gets to keep the investment income and interest.

So, not only do insurance companies get free access to capital, they may actually get paid to hold it.

Insurance companies make such great investments that legendary investor Warren Buffett has used them as the foundation for Berkshire Hathaway. He writes about insurance in almost every one of his annual letters.

To single out the very best P&C insurance companies, we created the Insurance Value Monitor...

Using this proprietary system, we rank P&C companies using hundreds of data points for dozens of fiscal periods. We focus on 12 attributes, including underwriting discipline and float.

Today, we're looking at a company that consistently scores near the top of ratings...

We're talking about W.R. Berkley (NYSE: WRB).

W.R. Berkley was formed in 1967 as a small investment management firm. But the company has since grown into one of the best P&C insurers in the United States. It boasts 53 "Berkley" brands that cover liabilities around the world.

The company is a perfect example of how great P&C insurance can be, when done right.

The "combined ratio" measures an insurance company's ability to consistently record underwriting profits. Anything less than 100 means it collected more in premium than it paid out in claims.

Over the past 12 months, W.R. Berkley had a combined ratio of 95.3. This is an excellent ratio, but it shouldn't be surprising for a great company like W.R. Berkley...

W.R. Berkley has had a combined ratio of under 100 every year since 2001.

Solid underwriting means W.R. Berkley can continue to grow and invest its float. Today, W.R. Berkley's float sits at just over $12 billion.

And it earned nearly $700 million in investment income on its float over the past year.

Most of W.R. Berkley's investments are in relatively safe assets, rather than potentially more lucrative stocks. But on the other hand, why take risks at all when you can do extremely well without them?

About 70% of W.R. Berkley's investments are in fixed income. And these investments have an average rating of AA-. In short, W.R. Berkley is playing the game to make sure it never, ever loses money.

This is great for shareholders...

Over the past five years, shares of W.R. Berkley have marched steadily higher. They're up more than 150% with dividends reinvested. And they recently hit a new all-time high.

More importantly, W.R. Berkley's stock has been relatively immune to large drawdowns. Over the past five years, there have been only five instances where WRB has fallen by more than 10%.

W.R. Berkley is a well-run company in the best business in the world. It's currently ranked fifth in our Insurance Value Monitor.

Sometimes investing is simple.