There's Safety in Insurance Stocks
You can also look at Dow Jones Industrial Average component Travelers(TRV) and you'll see yet another example of a cash-cow insurance company that's generating $64-per-share in trailing 12-months revenues.
TRV recently reported its second-quarter 2012 results. It produced $499 million in net income, which represents $1.26 per diluted share. Year to date, its return on equity is at 10.5%. Not bad for a business model that takes in billions of dollars at no carrying costs whatsoever.
That's one of the reasons why the most successful investors like Warren Buffett own insurance businesses. His company Berkshire Hathaway(BRK.B) owns car insurance powerhouse Geico.
Most states have laws requiring drivers to have auto insurance. So Geico is available in all 50 of them with competitive pricing and aggressive advertising campaigns. It also does homeowners and renters insurance, which comprises a growing amount of its revenues.
Its cash-generating success is one of the biggest reasons Berkshire Hathaway investors have averaged an annual total return of around 16% over each of the past three years.
As Buffett wrote in a recent annual letter to shareholders concerning the advantages of being in the insurance business, "We have now operated at an underwriting profit for nine consecutive years, our gain for the period having totaled $17 billion."
Buffett elaborated on this theme: "I believe it likely that we will continue to underwrite profitably in most -- though certainly not all -- future years. If we accomplish that, our float will be better than cost-free.
"We will profit just as we would if some party deposited $70.6 billion with us, paid us a fee for holding its money and then let us invest its funds for our own benefit."
It's hard not to love an industry built upon the idea that it takes in billions of dollars of other people's money at no cost, and is able to keep every dime that it doesn't have to pay out in claims and operating expenses.
With the money these insurers keep, they can invest in all kinds of profitable ventures like real estate, lending companies, international sovereign debt, precious metals or whatever asset classes are profitable.
Two of my personal favorite companies that are on my watch list include The Hartford Financial Services Group(HIG) , which is selling at a forward PE ratio of around 4.5 (cheap!) and reports earnings on August 1.