Why This Insurance Company is One of the World's Best Businesses
The insurance market continues to harden...
According to underwriter MarketScout, insurance pricing has increased about 5.8% in the fourth quarter of 2021. That's down from 6.8% growth in the third quarter, and 7.1% growth in the fourth quarter of 2020. But while the rate of growth has slowed down recently, prices are still increasing.
In fact, an insurance pricing report from the Council of Insurance Agents & Brokers ("CIAB") recently showed that insurance prices have increased for 16 straight quarters.
Essentially, that means property & casualty (P&C) insurers, which cover the risk of property and liability damage, are able to charge higher premiums. That brings more money into their businesses.
These market conditions are great for P&C insurance stocks. Based on an analysis of hard markets going back nearly 40 years, those stocks returned nearly 27% per year on average. Compare that with just 11% per year on average during soft markets.
In other words, P&C insurance stocks return almost 2.5 times more during hard markets.
And this hardening price market hasn't stopped yet... It's showing few signs of easing. That should continue to be a tailwind for P&C insurers in the coming quarters.
And remember, P&C insurers are one of our favorite businesses out there. They are the only companies that enjoy a positive cost of capital. In fact, these insurers get paid to hold other people's money. In every other industry, companies must take on debt to grow their businesses and pay interest on those loans.
Legendary investor Warren Buffett knows the power of these businesses. He used P&C insurers to build up his Berkshire Hathaway (BRK-B) holding company.
So, the hardening market provides an additional boost for an already great business. And that's a boon for today's company...
W.R. Berkley (NYSE: WRB) is one of the top P&C insurers out there...
As we covered in September 2019, 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 52 "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.
Just look at its "combined ratio." This metric measures an insurance company's ability to consistently record underwriting profits. Anything less than 100% means it collected more in premiums than it paid out in claims. So, the lower the number, the better.
In the most recent quarter, W.R. Berkley reported a combined ratio of 90.4%. This shouldn't be surprising to those who know W.R. Berkley's business – the company has reported an underwriting profit in every quarter since the third quarter of 2017. And on an annual basis, its combined ratio has been below 100% every year since 2001.
That's a great track record of underwriting profits...
And W.R. Berkley continues to invest its "float" wisely. Remember, "float" is the money an insurer collects in premiums but hasn't paid out in claims yet. In the meantime, the company can invest this money and keep all of the profits, including interest, dividends, and capital gains.
In the most recent quarter, W.R. Berkley reported a 26% jump in investment income, hitting $179 million. And for the year, its investment income has grown about 26%, reaching more than $500 million. Even better, W.R. Berkley achieves this high rate of return despite many of its investments being in relatively safe assets, rather than potentially more lucrative stocks.
And it's well known for rewarding shareholders through dividends...
Not only does W.R. Berkley pay a quarterly dividend, but it has a history of paying out huge "special dividends." In the past 12 months, the company has paid out two of these dividends, on top of its regular payouts.
Here at Stansberry Research, 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.
W.R. Berkley consistently sits at the top of our P&C insurance rankings. Currently, it's the third-highest ranked P&C insurer on our list. And it's trading at a 30% discount to its float plus book value.
W.R. Berkley is a strong underwriter, has an experienced management team, and loves to reward its shareholders. That makes it a leader in one of the best businesses in the world.
Sometimes investing is simple.