Inflation has been hot for over a year and has wreaked havoc on markets, and the Federal Reserve is raising interest rates at the fastest pace in years to fight it off. But one Warren Buffett stock is holding up well and is benefiting from what has been a headwind for many other businesses.
As the CEO of Berkshire Hathaway for 57 years, Buffett has delivered returns of 20% annually, so investors shouldn't be too surprised that one of his longtime holdings, Globe Life (GL +0.16%), is beating inflation and the market, up 20% on the year. Here are the factors contributing to this company's solid performance this year.
NYSE: GL
Key Data Points
Post-pandemic tailwinds have benefited this insurer
Globe Life sells life and supplemental insurance covering cancer, intensive care, and supplemental Medicare. Life insurers faced difficulties in the last few years with the pandemic, causing the claims paid out on life insurance policies to jump.
In 2020, Globe Life saw $67 million in claims costs due to COVID-19. That figure jumped to $140 million last year as mortality rates spiked in young people. The company is beginning to see mortality rates return to average trends and expects COVID-related claims to fall to $51 million this year and $20 million next year.
Globe's life-insurance premium growth is 4% this year, but when you factor in lower claims costs, its underwriting margin, i.e., total premiums minus total obligations, has jumped 28%. Underwriting margin is a measure of profitability used by management.
Improving claims experience, or in other words, the improved experience of claiming insurance following an accident or emergency until funds are deposited in the policyholders' accounts, has been a big tailwind for several life insurance companies, including MetLife, Aflac, and Unum Group, which have also seen their stocks charge higher in 2022.
Why Warren Buffett loves the insurance business
Since 2001, Buffett has owned stock in Globe Life, making it one of his longest holdings. What makes it appealing to Buffett is the industry it operates in and the cash flows it generates.
Insurance companies operate in a way that seems backward from typical companies. That's because they collect premiums up front and don't provide their service until a customer files a claim. As a result, cash flows could take a while to pay out, giving insurers a pile of cash they can put into short-term investments to juice returns. This is called float, and as Buffett explains, it's "money we hold and can invest, but that does not belong to us."
Through its subsidiaries of GEICO, Berkshire Reinsurance, and General Re, Berkshire Hathaway is the leader in float, so it's not surprising to see Buffett invested in public companies with this similar advantage.
Globe Life is capitalizing on higher interest rates
Since March, the Federal Reserve has raised its federal funds rate from near zero to an upper level of 4% -- its fastest pace of increases in decades, in an effort to fight inflation.
Insurers have enjoyed higher interest rates because it means they can collect more interest income on their investments. Globe Life has a $17.6 billion investment portfolio mainly in corporate and municipal bonds. It has been reshaping this portfolio, cutting riskier investments and replacing them with safer bonds with higher interest rates.
In the third quarter, the insurer sold $324 million of fixed-maturity investments that had a riskier credit rating of BBB. It then put $431 million to work in investment-grade securities with an average credit rating of A+. One of Globe Life's criteria for investing in these bonds was to target companies that could survive multiple economic cycles.
After over a decade of ultra-low interest rates, Globe Life is finally seeing the yield on its investment portfolio increase. The average yield on new investments is 5.56%, above its portfolio yield of 5.17%. This is the first time Globe's average yield on its portfolio has increased since 2008. The insurer is taking advantage and will have invested $1.4 billion at these higher rates by the end of the year.
What to expect
Management projects the company's net operating income per share for 2022 to be between $8 and $8.20, up 18% from last year at the midpoint. The company sees 2023 net operating income per share of $9 to $9.70, which would be another 15% increase at the midpoint.
Globe Life is enjoying tailwinds from waning life insurance claims relating to the pandemic and is capitalizing on higher interest rates, which should bode well for the company.
