Issue #13, Volume #2
Even The Smartest Investors Don’t Understand P&C Insurance
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| How W.R. Berkley consistently compounds capital… Net income grew 45% last year… Even many successful investors don’t understand P&C insurance companies… What Trump’s tariffs mean to you and to the world… Anticipating this week’s jobs reports… |
I’ve been writing about and recommending the shares of W.R. Berkley (NYSE: WRB) since 2012.
There are lots of reasons to love this property & casualty (P&C) business, but to me what’s so special about W.R. Berkley is that it’s a family business. It was founded by Bill Berkley in the late 1960s while he was still a student at Harvard. Today his son William Jr. is the CEO.
Like Warren Buffett, Bill was an investor and has deliberately created one of capitalism’s most consistent compounding machines. Here, I’m going to explain the secret to these P&C insurance businesses: because they are money machines.
Last year, W.R. Berkley produced extraordinary results. Net income grew 45% to a record $576 million after taxes. The business produced earnings equal to 30% of its starting 2024 equity. And it returned almost $300 million to investors via dividends, special dividends, and share buybacks.
W.R. Berkley has two core sources of income.
First, it sells insurance against a wide range of risks through dozens of subsidiaries. In total, the company sold $14.2 billion worth of insurance last year, up from $12.9 billion in 2023. The company’s combined ratio was 90%, meaning that after insured losses and overhead, it earned $1.4 billion on its core assurance business.
But that’s not the only way it makes money.
The company also controls a huge pool of capital, its “float” – the money people have paid in premiums that the insurance industry holds to pay for claims. These assets are mainly invested in investment-grade bonds, high-quality stocks, and real estate.
Currently W.R. Berkley’s float is worth $20 billion. It’s these funds that exist to backstop the insurance policies it sells. And thanks mainly to higher interest rates, its investment income grew 26% to $1.3 billion in 2024.
I spent last week at a health spa (Canyon Ranch in Arizona) with members of the MarketWise Fellowship – a group of self-made and extremely successful folks. But probably much like yourself, they are not experts in insurance investing. I was explaining the business model to them and they asked a good question:
“Porter, sure, insurance has been a great business for a long time. But with global warming, with the increase of mass casualty events, like the California wildfires, why would you expect insurance to be a good business going forward?”
Most people think that insurance companies will do worse as risks grow – especially litigation risks, because America is incredibly litigious (see here for our thoughts on the impact of the California wildfires on P&C insurance companies). But, they’ve got it backwards.
Insurance companies price risk.
As risks increase, prices rise. And that means profits rise too.
Yes, insurance is a risk business. But for companies like W.R. Berkley that consistently make large underwriting profits, it isn’t a risky business. And because most investors simply don’t understand the difference, shares of these companies are usually priced cheaply compared to the quality of the business and their growth rate.
The best way to judge the value of an insurance company is, first, by looking at its combined ratio. Does it make underwriting profits? Yep. Virtually every year, W.R. Berkley has made an underwriting profit. And perhaps because the founder still owns 20% of the shares, you can bet it’s going to maintain its underwriting standards.
The other factor that matters is the size of the company’s float – the pool of capital that powers its investment income. Since I first recommended the stock in 2012, W.R. Berkley has doubled the size of its float almost 10% a year, from around $10 billion to a little over $20 billion today.
Double-digit underwriting profits. And double-digit float growth makes an incredible compounding machine. The year I first recommended the stock, it paid $0.41 in dividends. Last year it paid $1.39 – a 239% increase in 12 years. The total return of WRB since then has been an incredible 653%… or 17% compounded per year.
This company, and others like it, represent a very low-risk way to beat the market.
You can read our full breakdown of the P&C sector – how it works and what we’re recommending now – by reviewing The Guide to P&C Insurance Investing, and the full Big Secret Property & Casualty portfolio.
I mentioned the fantastic time I had at the Canyon Ranch health spa in Arizona… and the best part of it all was the company. To learn more about the Fellowship – I have to warn you, it’s not cheap and it’s worth every penny – see the presentation I put together here.
Three Things You Need to Know Before We Go…
1. The tariff roller coaster. President Donald Trump on Saturday signed an order to impose 25% tariffs on imports from Mexico and Canada (energy from Canada is taxed at a 10% rate), and a 10% tariff on imports from China. Global markets fell in reaction to what the Wall Street Journal called “the dumbest trade war in history”… and, as we said on January 24: “It will put the entire global financial system at risk.” U.S. markets recovered somewhat on Monday, after it was announced that Mexico agreed to some concessions – and Trump deferred the imposition of tariffs on Mexico for a month. What’s sure to follow: More uncertainty… the threat of inflation… and an increase in global tensions.
2. Gold and Bitcoin diverge as risk sentiment shifts. The price of Bitcoin fell to $90,000 this morning (it was $105,00 on Friday) on news of the escalating trade war (see below), accelerating a decline that began last Monday with the selloff in financial markets driven by the release of Chinese AI startup DeepSeek… before rebounding to over $100,000 on the news of Mexico’s tariff concessions. Over the same period, the price of gold has jumped by $150 per ounce, nearing $2,900… an all-time high. So which is the best way to preserve value?… the answer – wait for it – is both: gold is the ultimate insurance, and Bitcoin is a great way to escape the fiat monetary system. And as inflation (inevitably) accelerates, both belong in a balanced portfolio.
3. Trade tensions unleash currency volatility. The Canadian dollar hit $1.48 against the U.S. dollar, the weakest level since 2003. Likewise, the Mexican peso slid lower, and has fallen around 25% against the U.S. dollar over the past year. Weakened foreign currencies will lessen the tariff impact for U.S. consumers, with higher tax costs partially offset by a stronger U.S. currency.
And one more thing… Today’s poll
Late last month, we asked Daily Journal readers about how aggressive you think President Trump will be with tariffs… and 81% of you opined that tariffs will be “strategic and targeted and used mostly as a negotiation ploy.” So far – given the last-minute delay in tariffs that were to be imposed on Mexico following concessions by Mexican President Claudia Sheinbaum on Monday morning – that looks to be correct.
Canada (and China), though, didn’t cave… and Canada is set to face 25% tariffs on most of its exports to the U.S. So now we ask:
Coming up this week: Important job numbers. Tuesday’s Job Openings and Labor Turnover Survey (“JOLTS”) gives a sneak peek into what to expect for Friday’s January jobs report from the Bureau of Labor Statistics. The JOLTS is expected to show that the labor market cooled slightly in January, showing about 8.89 million open jobs, a 1.5% decline from December. On Wednesday, the monthly Services Purchasing Managers Index (“PMI”), which gauges business activity in the services sector, will be released… the PMI finished 2024 at 54.1, and is expected to clock in at 54.2 for January (a reading below 50 indicates economic contraction).
In Case You Missed It…
Monday started with big news – causing the Nasdaq to fall 3.4%, and Magnificent 7 member Nvidia (NVDA) to drop 17%. The cause was, as we wrote in Monday’s Daily Journal, the release of DeepSeek, a new AI platform from China that blindsided U.S. chipmakers…
In Thursday’s Big Secret update, we replaced all three of our “Top 3 Best Buys” with new compelling opportunities. The Top 3 list is designed to help subscribers understand where we see the best value in the portfolio.
And in Friday’s Daily Journal, we asked (and answered): What should investors do when facing a lost decade in future equity returns (as we do today)?
We published our second issue of Saturday Stock Screen… and highlighted one company whose shares are down sharply, and are poised to recover (those details are available only to Partner Pass members… To learn more, call Lance James, our Director of Customer Care, at 888-610-8895 or +1 443-815-4447.)
We launched Sunday Investment Chronicles, which highlights the most compelling insights from Porter & Co., from the previous week. And… also in Investment Chronicles, we share the most interesting and valuable research from elsewhere in the worlds of investing, finance, and economics that we come across.
And, finally, on Friday, we released the newest Black Label Podcast episode. This month Porter and co-host Aaron Brabham welcomed special guest Edward Dowd – founding member of economic consultancy Phinance Technologies – to shed light on the newest COVID data, heat up some of the latest conspiracy theories, expose certain aspects of the life-insurance industry, and share thoughts on Porter’s latest charity idea. Jump into this episode right here.
Mailbag
Yesterday, as mentioned above, we launched Sunday Investment Chronicles, which highlights the most compelling insights from Porter & Co., from the previous week… and we share valuable research from the worlds of investing, finance, and economics that we come across. Here is what some readers think of it…
Thank you for the Sunday Investment Chronicles. Lots of interesting articles and news. Useful.
Roderick W.
I like the Sunday Chronicles idea… thanks!
Rodger G.
I am very pleased to get your Sunday round-up of news and events.
Cassandra
I have to say, I started out really liking the new Sunday weekly. But, honestly, by the time I finished, I felt rather overwhelmed by the overall size of the offering.
Donna R.
Good investing,
Porter Stansberry
Stevenson, MD
P.S. In the 1980s, a man named Mason Sexton shocked the world with his uncanny prediction about the Black Monday crash – 11 days before it happened in October 1987.
The Economist said that he “could be the new guru.”
Mason wasn’t interested in the notoriety that goes along with that kind of fame, though. So… he vanished from the public eye.
But he continued to make astonishing market calls for his private clients. In March 2008, called the bottom of the Global Financial Crisis crash.
And in early 2020, he warned that the top was in, and that it was time to sell… and the Nasdaq collapsed by 36% in the following weeks in the COVID crash.
And now… Mason has agreed to return to talking about his calls in public. And he believes that something big – very big – is brewing in markets within the next two months.
So big… that he’s calling it The Prophecy. He reveals in a special interview what he sees happening… when it all will start… and what you can do to prepare.
