One of the World's Best Businesses Is a Great Value Today

For generations, the world's greatest investors all flocked to P&C insurance...

We're talking about guys like Warren Buffett, his mentor Ben Graham, and Shelby Davis – who turned a $50,000 investment into a billion by investing in nothing but insurance. When the world's best investors all end up gathering around the same watering hole, you should pay attention too.

In fact, Buffett just added more property and casualty ("P&C") insurance to his business...

Earlier this month, Buffett's holding company Berkshire Hathaway (BRK-B) announced that it had agreed to buy P&C insurer Alleghany (Y) for $11.6 billion. This comes after years of Buffett lamenting a shortage of good candidates for acquisitions. Well, he just found one in his favorite business – and jumped at the chance to buy it.

Stansberry Research founder Porter Stansberry has long called P&C insurance the "best business in the world." You see, P&C companies get paid to use other people's money. And the key is "float"...

Put simply, float is the premiums collected by a company but not yet paid out in claims.

Essentially, that mechanism – and the natural human fears of trouble or loss – allows P&C companies to make a lot of money. You can think of float as "free capital." As customers pay premiums, the insurers collect the payments and can invest the cash as they see fit. And the insured events may not even happen – meaning the company keeps the premiums.

And even if the insurers do pay out claims, they get to keep all of the investment income and gains. This produces loads of cash flow for the P&C insurance sector.

Today, we're highlighting one of our favorite P&C insurers right now – Enstar (Nasdaq: ESGR).

Enstar isn't your typical P&C insurer. Instead, it's a "run-off insurer." Run-off insurance is business that's no longer being actively written by a company. Think of it as discontinued business. It could be an entire insurance business or simply one particular line of insurance.

For example, an insurer might decide to get out of the business of writing workers' compensation insurance. It will stop writing new policies and collecting new premiums. All that's left is handling the claims of the old policies.

Here's how Enstar's business works...

When Enstar acquires run-off insurance, it assumes the estimated future claims of all of the outstanding policies. These estimates are recorded as a liability on Enstar's balance sheet.

But Enstar also acquires assets from the insurer in the form of cash and investments, and then uses these assets to pay off future claims. The company earns profits if it can pay out less in claims than the liabilities it assumes. For example, let's say that it took on an equal amount of run-off liabilities and assets, each totaling $250 million. If Enstar only winds up paying out $200 million in claims over time, it gets to keep the $50 million difference as profit.

It's a great business if you're good at it. And Enstar is... It has bought more than 100 run-off policies since its inception in 1993. It's now the largest stand-alone run-off insurer.

It's able to do this by carefully managing claims. After acquiring run-off policies, Enstar actively negotiates with policyholders to settle future claims at discounts to the liabilities they assumed. In other words, Enstar squeezes the risk out of the policies and pockets the remaining profits.

The company doesn't acquire just any run-off business. Its actuaries carefully study the existing claims and the risks of policies before taking them on. It's a form of "underwriting" that requires a unique skill set.

Whether it's through run-off expertise or by writing new business, Enstar says its main goal is to increase its book value. Simply put, book value is the value of all of a company's assets if it were to be liquidated. So growing book value means Enstar is growing the value of its assets. Since becoming a public company in 2007, it has done just that. Over the past four years, Enstar has nearly doubled its book value per share – from $161.63 in 2017 to $316.34 at the end of 2021. Given Enstar's strong business and track record, this trend should only continue from here.

We have long considered P&C insurance to be one of the best businesses out there. In fact, Stansberry Research has its own proprietary Insurance Value Monitor, where we rank the top P&C insurance companies.

Currently, Enstar ranks in the top five on our monitor. And it's still trading at a huge discount to its float plus book value. That means it's a great opportunity for one of the best P&C insurers out there.

Sometimes investing is simple.