Last week we laid out a system for building consistent wealth. Then we outlined seven different investment themes through which one could implement such a system. They are:
- Bitcoin
- Gold
- World-Class Insurance Stocks
- Top-Tier Energy Stocks
- Gold Royalty Stocks
- Consumer Inflation Hedges
- High-Technology Stocks
We talked about the ‘why’ for Bitcoin and gold last Thursday. Today let’s cover world-class insurance.
World-Class Insurance Stocks
World-class insurance refers to property and casualty (P&C) insurance companies. Believe it or not, this is one of the best businesses in the world.
To understand why, we have to understand the P&C business model. It sounds boring… but there’s magic hidden within the nuances.
P&C is about insuring against property damage and potential casualties. These are uncertain events that may never happen. But if they do, it could be catastrophic for the companies (or individuals) involved.
Therefore, we all buy P&C insurance.
As individuals, this is our homeowners insurance and our car insurance. On the enterprise side, large corporations need to insure their buildings, equipment, vehicles, and any other property deemed critical to business operations. They also need liability insurance to protect them from lawsuits. And then US regulations say they must also buy workers’ compensation insurance (workers’ comp) for their employees.
So insurance is a product we buy and hope we never have to use it.
And the actuarial data shows that we’ll probably get our wish. As tragic as they are, car crashes impact very few people. And it’s even less frequent that a building burns down.
So the beauty of this business model is that the insurance company gets paid on every policy before it pays any claims. Even better, it may neverhave to pay a claim for a given policy.
If our home doesn’t burn down, the insurance company gets our money without doing anything for us. Same goes if we don’t wreck our car.
This is the exact opposite dynamic from what exists in most other businesses. Most companies need to provide goods and services first. Then they get paid afterwards.
And here’s why this is so powerful…
Insurance companies get to invest the premiums they receive right away. This allows them to constantly grow what’s called “the float”. The float is the difference between premiums collected and the amount of money set aside to satisfy claims.
In other words, the insurance company doesn’t only make money by selling policies. The good companies also make money by investing policy premiums well. And they invest primarily in bonds, money market funds, and mortgages—instruments that pay a yield based on interest rates.
And that’s why the best property and casualty stocks are so attractive right now…
The Federal Reserve (the Fed) slashed its target interest rate to zero in the fourth quarter of 2008. Then it worked to keep interest rates near-zero for the next fourteen years.
This reduced the rate of return insurance companies could generate with their investments. Because yield-bearing instruments don’t produce much income when interest rates are zero.
The Fed began normalizing interest rates in 2022 – even with the world screaming at them to stop. In fact, we’ve just witnessed the fastest rate hiking cycle in the Fed’s history.
This has been a boon for the insurance industry. Suddenly their investments are paying a solid rate of return once again. And many property and casualty companies are reporting record levels of investment income as a result.
And here’s the kicker – the property and casualty industry is largely recession proof.
This industry is resilient… for a simple reason. P&C companies service needs, not wants. Their customers need their products.
Think about it this way – do we cancel our homeowners or car insurance when we want to cut our spending?
Nope. Because we can’t. It’s the same dynamic on the enterprise side.
So here we have an industry that’s set to grow its profits and its dividends in the years to come thanks to normalized interest rates. And its products will remain in high demand even during recessions. What’s not to love?
The key is to only buy the best companies at the right valuation… and then let them run.
If we do, these world-class insurance companies will print money for us quarter after quarter. Especially if we automatically reinvest our dividends. That’s how we leverage the power of compounding interest.
For this reason I see world-class insurance stocks as the cornerstone of a robust investment portfolio.
They aren’t flashy… and they aren’t going to produce massive capital gains. But these are safe investments (when bought at the right valuation) that will compound returns for us year after year.
If you would like more guidance on how to integrate world-class insurance into your portfolio, give our investment membership The Phoenician League a look.
We offer professional analysis on several stocks in the property and casualty sector. And we help members build a bulletproof investment portfolio, step by step.
You can get more information at our membership portal right here: https://membership.phoenicianleague.com/
-Joe Withrow
P.S. Tomorrow we’ll look at our next investment theme – top-tier energy stocks.