It can be tough to get wildly excited about insurance companies as investments since it's rare that an insurance stock will have a huge spike over a short period of time. However, from the perspective of a Foolish investor -- that is, an investor looking to build their portfolio over longer periods of time -- the steady, compounding growth of a quality insurer can be a great addition to your portfolio.
A perfect case in point is Berkshire Hathaway
The solid one
If you are a fan of Berkshire, you'll definitely want to tune into the story at Alleghany
Conservatism dominates our management philosophy. We shun investment fads and fashions in favor of acquiring relatively few interests in basic financial and industrial enterprises that offer the potential to deliver long-term value to our investors.
That comes from Alleghany's annual letter to shareholders. The company is based around a collection of specialty property and casualty insurers and focuses on solid underwriting results from those businesses, combined with returns from debt and equity investments. It also targets longer-term growth through investments in non-insurance operating companies.
A similar business philosophy isn't the only thing that ties Alleghany to Berkshire. Alleghany acquired fellow insurer Transatlantic at the end of last year, beating out a number of other bidders, including Berkshire. And well before Berkshire decided to acquire all of Burlington Northern Santa Fe, the railroad was the largest position in Alleghany's portfolio.
Beyond the Berkshire comparison, the quality of the company can be seen in the results it produces. Though the nature of the business means that profits may not rise predictably from year to year, Alleghany has more than doubled its book value per share over the past decade.
The dicey one
On the bright side, Assured has performed far better than its major competitors as of late. It's obviously fared better than the bankrupt Ambac, but it's also managed to avoid the battering that MBIA
On the other hand, there are significant challenges that the company is facing. For one, its credit rating was downgraded at the end of last year, and its bond-backing services are only as good as its own credit worthiness. At the same time, as investors have watched the struggles of bond insurers, they've started to wonder whether they really want to rely on these insurers' services. Both of those challenges have slowed demand for Assured, and its premium revenue has been in decline. Through the second quarter of this year, premiums have fallen 15% from last year. And as if that's not enough, insurers from outside the financial guaranty segment have started encroaching. Over the summer, White Mountains Insurance announced that it'd funded a subsidiary that will focus on municipal-bond insurance.
So what's the case for investing in Assured Guaranty despite all of this? With the exception of 2007, the company has stayed solidly profitable and the stock is trading at just a bit over half of its tangible book value, which, historically, is a very low valuation.
The odd one
The two insurance companies above are "normal" insurance companies from the perspective that their business is selling insurance protection. But that's not where Enstar Group
By being an expert in valuing run-off companies, negotiating deals to buy them, and then managing the run-off process, Enstar has notched impressive growth. Since just 2007, the company's tangible book value is up nearly 140%. Over the same period, net income is up more than 200%.
Because Enstar relies heavily on industry relationships and deal-making prowess, this is very much a people-driven business. Fortunately, the company is run by Dominic Silvester, who founded a run-off services business in 1993 that is now at the core of Enstar. Silvester also is the largest Enstar shareholder, with an 11% stake in the company.
Though Berkshire is a great insurer, the company is probably best known because of the investment savvy of its CEO, Warren Buffett. One of Buffett's favorite companies happens to be a bank that my fellow Fools think is "the only big bank built to last." To find out which of the banking powerhouses I'm talking about, click here to access the free special report.
The Motley Fool owns shares of Alleghany, White Mountains Insurance Group, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Alleghany. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.