From Stansberry Research:
We've long considered it "the best business in the world"...
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 a liability, damages caused due to the insured person's negligence – like medical malpractice.
It's the only business that allows companies to enjoy a positive cost of capital. In every other business, companies must pay for capital.
But not all insurance companies enjoy this advantage. Only the best insurance companies earn a positive cost of capital.
Underwriting ability is the secret...
Underwriting is the ability of a company 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 amount – 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 the claims... And they only accept business that adequately compensates them for the risk.
Another secret of the P&C business is float – the premiums collected but not yet paid...
Remember, insurance companies collect premiums up front, but the claims are often paid much later, if at all. The insurer invests the premiums and gets to keep all of the investment income and profits.
In other words, these companies not only receive capital for free... they get paid to accept it.
You won't find this advantage in any other business in the world.
Each quarter, in our proprietary Insurance Value Monitor, 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.
Travelers (NYSE: TRV) is one of the best P&C insurers around. The company is a mainstay near the top of our Insurance Value Monitor.
It is one of the oldest insurance companies in the U.S., dating back to 1853. It provides a wide range of commercial and personal P&C insurance products to businesses, governments, and individuals.
Travelers provides auto, home, and business insurance through its 30,000 employees across the U.S., Canada, the U.K., and Brazil. It earns about 94% of its revenue in the U.S.
After more than 160 years in business, Travelers has built a stellar reputation for itself. And it's paying off...
Travelers earned underwriting profits in nine out of the past 10 years.
Travelers' float totals more than $50 billion today. Travelers invests this money and keeps all of the income and capital gains.
The company is a great example of how lucrative P&C insurance can be, when done right. And it continues to grow steadily. In 2018, Travelers grew its net premiums to a record $27 billion – 5% more than 2017. It earned an underwriting profit of nearly $700 million. And Travelers invests its float wisely, too... It collected almost $2.5 billion in investment income last year.
If the past is any indication, the company will continue to underwrite profitably and to grow its float. And we expect the stock to follow suit. At today's price, shareholders earn a 2.4% dividend yield.
When a top 10-ranked company in our Insurance Value Monitor trades for a 50%-60% discount to its float plus its book value, we buy it.
Travelers has consistently been a Top 10 P&C insurer in nearly every ranking since we began our proprietary system. Today, it's ranked seventh and trades at a discount of 54%.
Sometimes investing is simple.