Today I thought I’d answer a reader question about a teaser that’s of particular interest to me — not because it’s particularly heavily marketed, I haven’t even seen the original ad or article our reader cites, but because I like the topic.
Here’s the question posted by Irregular bunion132 recently:
In a recent piece entitled “The One Business I’ll Teach My Children”, Porter Stansberry discusses why Insurance is the world’s best business. It reads like a lecture on factors to consider when investing in insurance companies – i.e. float and underwriting profits. However, he also shows a chart of “four of the best-managed property and casualty (”P&C”) insurance companies in the United States”, providing the following descriptions:
Company No. 1 is a major global company that insures virtually anything and is worth roughly $41 billion. It has produced more than five times the S&P 500’s long-term return because, using a small equity base, the firm has profitably invested underwritten float into solid investments, year after year.
Company No. 2 started in the 1930s insuring jitney buses, and later, long-haul truckers. In 2019, it serves niche markets and underwrites specialty insurance products. The company is worth about $15 billion.
Company No. 3 got its start insuring contact lenses. In 2019, it focuses on things that other companies won’t touch, like oil rigs and summer camps. It’s a small public company worth a little more than $4 billion.
Company No. 4 was founded by a Harvard Business School graduate 50 years ago. It’s still mostly a family business (even though it has public shareholders and is worth around $13 billion). It insures almost anything commercial, from yachts to elevators.
Does the Thinkolator or its cult following (saying this in fondness) know the names of these companies?
So…. good questions, bunion132! And I do love insurance as an investment, so let’s see if we can ID these. I haven’t seen the original ad or article you reference from Porter, but he has long championed property & casualty insurance as one of his favorite long-term investment ideas and one of the best businesses on earth (and he’s not wrong). Stansberry even has an insurance data service called Insurance Data Monitor that I believe is given to all Stansberry Investment Advisory subscribers — I don’t know how successful or predictive their rankings of insurance companies are, but the criteria used seem rational and it probably does well (though it’s insurance data and these stocks tend to not be terribly sexy, so it’s probably also hard for Stansberry to sell to subscribers even if it does well — one common refrain I hear from newsletter folks in general is that individual investors are least likely to value the most valuable content or advice, partly because it’s boring, which is why they sometimes lament, perhaps over that third whisky, that they “have to” sell hyped-up junk in order to get attention).
This wasn’t a big hype-y tease, apparently, and I don’t even know which service he might have been touting, if any, or if there was more detail from him, but we do like to follow the hints and find the secrets… so I’ll see what i can do with these clues you’ve dropped…
“Company No. 1 is a major global company that insures virtually anything and is worth roughly $41 billion. It has produced more than five times the S&P 500’s long-term return because, using a small equity base, the firm has profitably invested underwritten float into solid investments, year after year”
Those clues are not terribly precise and could match a few different companies, depending on what other criteria you’re using, but since we’re sticking with just property & casualty insurance companies here and want something with a market cap near $40 billion and a long period of dramatic outperformance relative to the S&P 500, I’ll have to go with either Progressive (PGR) or Travelers (TRV).
Progressive is technically the best match on market cap and market outperformance at the moment, though I don’t know when these hints were dropped. The company seemingly took inspiration from Warren Buffett’s delight in massive marketing spending for direct insurance sales with GEICO and used that to grow at least as fast as Berkshire’s gecko-sold insurance operation. Travelers was roughly the right size before its recent drop, and is a diversified international P&C insurer so is probably a better match thematically, but has really just matched the S&P 500 for most of its history. If forced to guess, I’d say it’s probably Travelers — just because that has often come up in Stansberry’s free articles and commentary about the best insurance companies, and because Progressive really doesn’t do any business outside the US (OK, and Canada), but this is definitely a guess.
There are some other companies that might reasonably get close to matching — Tokio Marine (TKOMF) is of a similar size and is much more global, though thanks to the disastrous Japanese stock market it has not outpaced the S&P 500 over any appreciable time period… .. Chubb (CB) has been a steadier and more stable insurer and is a better match for the global reach and “insures anything” idea, but is too large at a $70 billion market cap (and has trailed the S&P over the past five years or so, since it merged with Ace). Aflac (AFL) is right up there, too, but isn’t a property & casualty company.
Progressive is an amazing company, churning out fantastic marketing-driven performance in the US auto market and (arguably) growing faster by out-advertising GEICO, which is backed by the deepest pockets in the world. I wouldn’t try to talk you out of that one, but it is expensive and it’s therefore far more speculative than your average property and casualty insurer — the shares trade at a remarkable valuation of 3X book, which really should limit future return expectations… but on the flip side, they probably are twice as good a company as Allstate (ALL) right now, and Allstate trades for 1.5X book value. Sometimes great companies are expensive for a reason and can sustain that, and Progressive does look more appealing since the shares have come down 20% or so since July, though I still can’t personally talk myself into paying this price for PGR. If we see some market weakness that brings the shares down to the low-to-mid $60s that’s when I can start really justifying the valuation, though I may, of course, be too conservative on this one — at least in part