Earlier this year marked 52 years since Warren Buffett first bought into the insurance industry. His initial foray was modest, by current standards; he paid $8.6 million dollars to acquire National Indemnity. On the surface, it didn’t look like such a great deal. National was worth $6.7 million, so Buffett paid a premium of $1.9 million to control the company. But controlling the company was not his main goal.
What Buffett was really after was National’s float – the cash the company controlled as a result of the natural lag between receiving premiums and paying policies. At the time, National Indemnity controlled $19.4 million in float – that is, it had collected that much in premiums and had not yet received customer claims against it. In controlling the company, Buffett controlled the float. Instead of putting it into safe, low-yield investments – as insurers usually did – Buffett started on his current path, of investing other people’s money into higher-yielding investments. The capital was the customer’s, of course, but the profits on it were Berkshire Hathaway’s.
National Indemnity remains, to this day, a subsidiary of Berkshire Hathaway. Buffett prefers owning or controlling insurance companies outright, rather than investing in the stock, as ownership comes with control of the float – and Berkshire’s float totaled $114.5 billion at the end of 2017. Some of that money, however, gets invested in insurance companies, and there are currently two insurers in Buffett’s portfolio.
We’ve dipped into TipRanks’ Stock Screener database to find out where some of Buffett’s favorite ‘float’ stocks stand in today’s market.
Formerly known as Torchmark, the company changed its name and stock ticker in August of this year to become Globe Life. Globe Life is a holding company, owning in its turn a variety of life and health insurance providers. It’s a microcosm of Buffett’s own attitude toward the insurance industry – control the companies that sell the policies, and in your turn control the float.
Globe Life, as an investment, is a good fit for Warren Buffett. He has held the stock since 2001, and has enjoyed the 10.5% annualized return it has brought in. GL pays out a modest but reliable dividend of 0.73%, paying 69 cents per share annually. The stock has appreciated 84.7% in the last five years, and is up 27% year-to-date.
So, the long-term fundamentals of the stock look healthy, which is what Buffett has always said he looks for in an investment. In an oft-quoted quip, Buffett says, “Our favorite investment horizon is forever.” The most recent review, however, doesn’t rate the stock as highly. GL holds a Moderate Sell rating, and the average price target of $86 suggests a 9% downside from the current share price of $94.
Despite the low rating, GL continues to be a solid performer in its industry. In its last reported quarter, the company showed EPS of $1.67, a 1.2% positive surprise from the $1.65 forecast and a 5% increase from the year-ago quarter. Sales were also robust, adding 4% in Q2. In short, the fundamentals show why Buffett continues to own over 6.35 million shares of GL, worth more than $568 million.
With Travelers, we get to the second largest casualty insurer in the US, and the third largest underwriter of personal insurance. Travelers is an industry leader and blue chip giant of the stock market, and the company’s stock performance shows why Buffett has invested over $890 million in 5.9 million shares.
TRV is up 22% year-to-date, notably higher than the S&P 500’s 19% gain, and the five-year gain is an impressive 75%. Like most of the stocks that Buffett keeps, TRV pays out a dividend, 2.23% with an annualized payment of $3.28 per share. Travelers has been a Berkshire investment since 2018, but expect Buffett’s company to hold this stake for the long haul. Berkshire Hathaway is already Travelers’ seventh largest investor, with 2.3% of the company’s stock.
A weak second quarter pushed TRV shares down in the analysts’ estimation, and the stock currently gets a Hold from the consensus rating. 5-star analyst Mark Dwelle, of RBC Capital, described the company’s situation after the Q2 report: “The quarter was weighed down by higher commercial auto severity and non-catastrophe weather-related claims, even though neither is seen as a significant drag for Travelers' future quarters.” Dwelle gave TRV a hold, but raised his price target by 10% to $160. His target suggests an 8.8% upside to the stock.
Insurance companies are not the only industry that rides on float. Banks, which take customer deposits and hold them until they are withdrawn, are the essence of float. And Buffett has long placed them among his favorite holdings. Per the most recent 13F filing, Berkshire Hathaway’s largest bank holding is Bank of America. Buffett owns 927,248,600 shares of BAC, worth an estimated $26.89 billion. The bank makes up 12.92% of Berkshire’s portfolio.
BAC stock has shown solid gains in recent years, appreciating 91% on the five-year horizon. The year-to-date gain is 22%. BAC shares pay out a 2.39% dividend, although the low share price keeps the payout to a modest 72 cents per share.
Morgan Stanley analyst Betsy Graseck gives the stock a Buy rating with a $31 price target, saying, “BAC has the most efficient consumer bank in our coverage with an expense ratio of only 45%. The consumer division has generated 1400bp of improvement in the expense ratio over the past five years as it has driven up revenues while bringing expenses down.” Her target implies an modest upside of 3%.
Weighing in from Oppenheimer, Chris Kotowski was more bullish. He increased his price target from $42 to $43, suggesting an impressive 42% upside potential to the BAC.
Overall, BAC shares have a Moderate Buy rating, based on 4 buys and 3 holds given in the past three months. Shares are selling for $30, and the $34 average price target implies an upside potential of 13%.
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