Insurance Stocks: Wall Street's Biggest Secret

Eddy Elfenbein submits: Here’s an investing secret that many Wall Street professionals know about, but few individual investors are in on. Promise not to tell anyone.

OK, here goes. Most investors think the successful investing is about buying shares in some company that’s about to invent the Eight Dimension. Sure, we all know the story about our neighbor's aunt's best friend who knew this guy who went to high school with one of the Google guys, and now he's like totally loaded. Goody for him, but that's not what investing is really about.

In reality, some of the best profits can be made in the dullest of industries. In my view, the duller the better. A great example is insurance. For those who don’t know it, insurance can be insanely profitable. It's disgusting, really (I love it!). Think about it: Insurance is a low-risk business, it has tacit state protection (try driving a car without car insurance) and it can’t easily be replaced.

Here’s how some insurance stocks have performed over the last 30 years:

Progressive (PGR).................................................95,548%
WR Berkley (BER)..................................................30,069%
AFLAC (AFL)...........................................................23,184%
Loews (LTR)...........................................................12,597%
Cincinnati Financial (CINF)......................................8,490%
American International Group (AIG)........................7,916%
Selective Insurance Group (SIGI)............................7,444%
Protective Life (PL)..................................................4,617%
First American (FAF).................................................4,055%
Old Republic International (ORI)..............................3,947%

Meanwhile, the S&P 500 is up about 1,230%.

I should add that I don't mean all insurance stocks are great investments. But the cream of the industry is about the best you can do.

Oh, and I nearly forgot to mention Warren Buffett. Insurance forms the basis of his entire fortune. Over the last 30 years, Berkshire (BRK.A) is up nearly 160,000%.

Comments

[FIG trader:]

I would agree that insurers like most financials have a license (state) to steal, but I would add some caveats. First, they have had some signifinicant rough patches in which they under-earned most financials by a wide margin, based on returns on capital and equity. The real issue is timing, since most people aren't waiting 30 years to find out. Don't mean to rain on the parade, but we are currently in one of those "high risk" periods, with the stocks discounting lower returns, but not the degradation mostly likely to come down the pike. Read HIG's CEO's comments to see what I mean, and look at the historical cyclicality in earnings for the industry. Its quite possible that in 3/4 years, they will be breakeven because of the severity of the downswing and under-pricing currently. Nobody ever wants to go to the video tape, but it happens every ten years or so. You mentioned some big winners (AFL, PGR AIG) obvious, but more money will be made on the short side of BER, PHLY, and ZNT in next 5 years (just retracing last 5 years up and probably going back to book ). It looks like the "top out" parade has begun in the whole financials group, though we could have one more burst to the upside.

2006 Nov 01 05:44 AM

[The Huff:]

Investors, now worrying about FDIC protection (or lack of) in CD's, Savingsand Money Market should look to AAA rated Insurance Companies, such as John Hancock or Transamerica. They should spread their funds across several insurance companies, investing in FIXED ANNUITIES, whic h are paying around 3.XX% to 4.XX% for 3 to 5 year terms.

If the improbable should happen, and the Insurance Company fails, the Annuity Funds are covered by State Guarantee Funds, ranging from $500,000 (for one) or up to $1,500,000 (for maximum of three). These Guarantees are funded by the Insurance Companies, who deposit a like amount for the term to the States.

Investors shouykld make sure that thier Insurance Company choices do belong to this Guarantee Fund - most of them do.


Shop around and reakly learn all about these instruments.

I am heavily vested and very happy. .

Mar 05 05:19 PM