Cash proof investment: Insurance - Auto & Property.
$Berkshire Hathaway(BRK.A)$ has just announced its Q4 2023 quarterly earnings on Fri, 23 Feb 2023.
Based on percentages alone, it was not as “fantastic” as the likes of recent runaway semiconductor stocks.
However, if amount value is considered, it is “amazing” really.
Allow me to elaborate.
Q4 2023 earnings report.
Operating earnings: came in at $8.481 Billion, up +28% YoY from Q4 2022’s $6.625 Billion.
Earnings per share (EPS): Class B EPS came in at $17.36, up +110.68% YoY from Q4 2022’s $ 8.24 per share.
Free cash flow: grew to $167.6 Billion, up +6.62% YoY from Q4 2022’s $157.2 Billion.
As said, a 6.62% gain seems “nay” in number terms.
However, when looking at the value $167.6 Billion amount, it is a staggering sum of money.
Fun facts:
Berkshire's shares have risen by +4,384,748% since Buffett took over in 1965,
This works out to approximately +19.8% compounded annually.
On the other hand, the S&P 500 in contrast, gained a respectable +31,223%.
This works out to about +10.2% annually.
Some analysts have observed that in recent years Berkshire has performed more like the index (ha, ha, ha).
What else?
Of the different income sources, Berkshire’s insurance investment made a “scary” +18,193% returns, the most of its investments. (see below)
Berkshire Hathaway - FY 2023 scorecard, not just Q4 2023.
Berkshire’s insurance businesses included (a) Auto insurer Geico (privately held by Berkshire) and (b) large property and casualty (P&C) reinsurance operations.,
It had an underwriting profit of $848 Million in Q4 2023 alone, compared with a profit of $160 Million in the year-earlier period.
Based on Barron’s assessment, Geico’s turnaround continued in Q4 2023 as the company notched an underwriting profit of $1.3 Billion.
This compared compared with a loss of -$400 Million in the year-earlier period.
Like other Auto insurer, Geico has (i) raised prices sharply and (ii) let customer policies lapsed, to restore profitability, a business decision — albeit one that is not sympathetic in times of hardship.
Average premium per policy was up about +17% in 2023, but Geico’s policies in force were down -10%.
Insurance - viable investment?
It was indeed eye-opening to witness a more than fantastic turnaround for Berkshire’s insurance business arm.
This sets me thinking, does investing in US listed insurance company makes good investment sense?
As a firm believer of the Chinese idioms “先苦後甜“, below are the “against” & “for” justifications.
Disadvantages.
Regulation: The insurance industry is highly regulated, which can limit flexibility and profitability.
Catastrophic events: Large natural disasters or other unforeseen events can lead to significant losses and impact profitability.
Competition: The insurance industry is competitive, and companies constantly strive for market share, potentially impacting margins.
Complexity of the industry: Understanding the insurance industry and its nuances can be complex for individual investors.
Limited growth potential: Compared to some other sectors, the insurance industry may offer slower long-term growth prospects.
Advantages.
Stable Cash Flow: Insurance companies receive steady premiums from policyholders, creating a predictable cash flow stream. This can be attractive to investors seeking income-producing assets.
Defensive Investment: The demand for insurance generally remains stable across economic cycles, making insurance companies potentially less vulnerable to recessions compared to other sectors.
Dividend Payouts: Many insurance companies have a history of paying regular dividends, offering investors a steady stream of income.
Growth Potential: The insurance industry can benefit from population growth, increasing demand for various insurance products. Additionally, companies that innovate and expand into new markets can offer potential for capital appreciation.
Diversification: Adding insurance stocks to your portfolio can diversify your holdings and potentially reduce overall risk.
Top 5 insurers - (Auto and Property & Casualty).
Below are the Top 5 US listed insurers (based on market capitalization) that are “investment worthy” considerations.
I have matched my “research” homework against TigerGPT to determine overall consensus. Ha, ha, ha.
Berkshire Hathaway. Not exclusively focused on auto insurance, its influence is significant.
$Travelers(TRV)$. Excels in P&C insurance. Its focus on risk management and underwriting excellence sets it apart. Other insurances include auto, homeowners, and commercial insurance.
$Chubb(CB)$. Specializes in P&C insurance, including high-net-worth auto and specialty lines.
$Progressive(PGR)$. A major auto insurer. Its innovative approach and competitive pricing contribute to its prominence.
$Allstate(ALL)$. A well-established insurer that provides comprehensive coverage, including auto, home, and other insurance products.
With the basic leg-work done, now it’s about drilling down on the shortlisted stocks to monitor.
My viewpoints: (mine & mine only)
Auto insurance is “mandatory” as long as one purchase a vehicle eg. car or motor bikes etc..
Property & Casualty insurance is “mandatory” for home owners. For “renters”, although “optional”, it is highly recommended to protect renter’s assets belongings and liability as a tenant.
This business line is “traditional” in that, its growth is still likely to spread by word of mouth.
It’s the “intangible” value-added services that is appreciated, eg. customer service, grace period, ease of claims, innovative products, insurer flexibility etc…
Once “hooked”, it is unlikely that the insured will switch to another insurer over a few dollars difference in policy. It is a “longevity” business.
Although deemed as “Cyclical”, the categorization does not truly reflect the “Mandatory” transaction nature of an Auto or P&C insurance policy.
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