Discover the boring business model that created some of the most unlikely millionaires and billionaires.
Today you’re getting a sneak peek at one of the Benzinga Research’s weekly research reports, in which our analysts break down the most explosive and potentially profitable opportunities on their radar. Today, we cover a "boring" business model that has dramatically outperformed markets over time—and created some of the most unlikely millionaires or even billionaires in the process. To get these reports in your email inbox every Tuesday, upgrade to Benzinga Edge here.
At age 38, Shelby Davis felt like a failure.
He had worked odd jobs as a CBS correspondent in Europe, before giving up his aspirations for a lasting career in journalism.
Then he became a speechwriter for a failed politician, Thomas Dewey, who told voters "the ocean is full of fish," and "America's future is still ahead of us," before losing a presidential election… twice.
After writing speeches for a laughingstock, Davis took a job as First Deputy Superintendent of Insurance in New York, a job that's as obscure and dead-end as it sounds.
But it came with one privilege. Davis could request balance sheets and statements of one of America's most arcane businesses. He studied them rigorously.
And in those mounds of filings that would have made almost anyone's eyes glaze over, Davis saw an opportunity. It seemed so compelling, he borrowed $50,000 from his wife's family to invest.
His $50,000 would turn into $900,000,000—a 1,799,900% return in 47 years.
Adjusting for inflation, he'd be a billionaire today thanks to his twelve investments across the industry.
So, in an era long before cryptos or white-hot tech stocks, how did an obscure bureaucrat manage a 1,799,900% return?
The answer is the field the world's greatest investor specializes in—what Warren Buffett in 2020 called "the engine propelling Berkshire's growth since 1967."
The Best Business on Earth
In 1999, Warren Buffett had a bad year.
Berkshire Hathaway shares had returned 0.5%, compared to over 21% for the S&P 500.
Buffett called it "the worst absolute performance of my tenure, and compared to the S&P, the worst relative performance as well."
He graded himself a "D" for the year… but made one self-assured prediction.
Berkshire, he said, would go on to modestly outperform the S&P 500 over the next decade.
He went on to explain why, starting with Berkshire's main business, which wasn't Coca-Cola, Wells Fargo, or any of his more famous holdings.
"Our main business — though we have others of great importance — is insurance. To understand Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the long-term outlook for both of these factors."
Buffett went on to explain the magic of "float"—that is, insurance premiums that insurers collect from customers, and get to hold on to and invest.
"To begin with, float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money."
Imagine being able to collect billions of dollars from people… invest it… and keep 100% of the profits from your investment while paying a small fraction of the insurance premiums you collected back to your customers who file claims.
That's property and casualty insurance. And there's no business on Earth quite like it…
Hedge funds and banks don't collect and invest capital for free, the way property and casualty insurers do.
Most hedge fund managers do pretty well for themselves, with the "two and twenty" model of keeping 2% of capital invested, and 20% of the profits they get for investors.
But what if they could keep upwards of 80% of the capital, they were given… and 100% of the profits?
I hope you're beginning to see how powerful this business model is. Each year, Berkshire Hathaway's property and casualty insurance firm, National Indemnity, collects billions of dollars in insurance premiums, pays back a fraction of them, and invests the rest, keeping those profits.
This staggering advantage was a major reason Buffett was able to predict that Berkshire would outperform the S&P 500 over the next decade.
His prediction came true, by the way… except for the part where he said Berkshire would "modestly" outperform the S&P 500. From 1999-2009, Berkshire A-shares returned over 70%, which the S&P 500 lost over 20%.
Source: Benzinga Pro
That outperformance is thanks in part to other quality companies in Buffett's empire—stocks like Coca-Cola (KO) and American Express (AMX) that have hiked dividends each year for the decades Berkshire has held them.
But Buffett has often pointed to property and casualty insurance as the backbone of Berkshire Hathaway's returns.
Shelby Davis's genius was to realize how the best insurance companies use "float" to tremendous effect long before Buffett—or even Buffett's mentor, Benjamin Graham.
Davis would go on to meet Graham, the "father of value investing," and bring a car insurance company, GEICO, to Graham's attention.
Graham invested in GEICO and went on to make 500 times is initial stake. He made more money from GEICO than all his other investments combined.
As Graham later put it: "In 1948 we made our GEICO investment. And from then on, we seemed to be very brilliant people."
But it's not just Berkshire or GEICO… dozens of property and casualty insurance firms have posted marketsmashing returns over the decades.
Since January 1990, the S&P 500 has gone from 332 to 5,633 as I write. That's a 1,596% gain in 34 years.
But in the same time frame…
The life insurance company Aflac (AFL) has posted a +5,857% gain
The insurer Chubb Ltd. (CB) is up +2,012%
The insurer RenaissanceRe Holdings (RNR) is up +2,721%
Insurer RLI Corp. (RLI) is up +9,745%
Progressive Corp. (PGR) is up +16,947%
The insurer Markel Group (MKL) is up +6,283%
W.R. Berkley (WRB) is up +4,237%
Selective Insurance (SIGI) is up +1,918%
And the insurer Arch Capital (ACGL) is up +4,554%.
I should note here that not all of these companies were publicly listed in 1990—a few began trading in the mid-1990s. Of course, that makes their runs all the more impressive.
Then there's Berkshire Hathaway itself, which collected $5.09 billion in insurance premiums in 2023 alone.
Its Class A shares have returned 5,300% since January 1990.
With Berkshire Class A shares trading at over $600,000 each, readers looking for exposure to insurance stocks might consider Berkshire's Class B shares, trading at $451/share as I write.
The main difference between Berkshire's Class A and B shares is liquidity: Class B shares have tended to underperform since the mid-1990s, but only very slightly, as owners are more likely to sell portions of their Class B stake for liquidity reasons. Class B shares come with only 1/50 of the voting rights of Class A shares— but for investors who trust Buffett's leadership, this is unlikely to be an issue.
Class B shares off exposure to not only Buffett's insurance empire, but also his greatest investments off all time—those "battleship businesses" that have multiplied their dividend payouts over the years, with dividend hikes coming, in Buffett's words, "as certain as birthdays."
That's a big reason why Benzinga Research has called Berkshire Hathaway "the ultimate retirement stock."
And that assessment applies to both classes of shares.
Readers looking for more of a pure play in property and casualty insurance might also consider W.R. Berkley (WRB).
WRB is among the larger property and casualty (“P&C”) insurers in the U.S. It offers insurance in dozens of countries in Europe, the Americas, and Asia. The company typically puts its float into more conservative investments like fixed income assets with solid credit ratings.
The company achieved $12.1 billion in revenue last year, a 57% increase over the last five years.
It achieved record profitability and revenue, with a record net income of $1.4 billion. Here's what should be exciting in the long term for WRB investors, in the words of CEO Rob Berkley: "This is the second year in a row our return on shareholder equity exceeded 20%. We were able to pay special dividends to our shareholders as a direct result of these outstanding returns. Book value per share, before dividends and stock buybacks, grew in excess of 25%. Our goal, as always, is to optimize our risk-adjusted return to our shareholders."
These market-beating returns are possible because as WRB receives billions of dollars more in float over the years, it continues to generate higher returns on that float—providing not one but two powerful catalysts for the company. And because WRB's float is invested in conservative assets, its float strategy reduces risk for investors even as it gives them a high likelihood of market-beating returns over time.
We see WRB as a standout in an industry that is exceptional in itself. And trading at $58.84/share as we write, with a modest price-to-earnings ratio of just 15.6, investors have a compelling opportunity to get into "the best business on Earth."
