Earlier this week, I looked at some of the smaller holdings in the portfolio of Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
Following a reader's comment, I thought I would review another small position in the portfolio, Globe Life Inc. (GL, Financial).
This company has been part of Berkshire's portfolio since the fourth quarter of 2006. Formerly known as Torchmark, Globe provides life and health insurance coverage nationwide.
This immediately stands out as the sort of business Buffett would want to own. The Oracle of Omaha has made the vast majority of his fortune in the insurance space, so it's an area he knows well. Berkshire also provides some services that overlap with Globe.
Growing business
As well as operating in a sector that Buffett understands, the company has created a lot of value for its investors over the years. An excellent way to analyze insurers is to consider book value growth over an extended period.
Most insurance companies only really break even on average every year. Profits in good years cover losses in bad years. Therefore, book volume tends to remain stagnant over the long term or grow in line with inflation.
On the other hand, well-run insurers that are consistently profitable report growing book value.
Profits from operations are reinvested to support premium growth and compound value. That's what we see with Globe. Book value has increased at a compound annual rate of 16.7% since 2014. Book value per share has grown at 20.6% per annum on average as the average number of shares outstanding has decreased by 3.3% annually.
These figures do not guarantee the company is well run and highly profitable, but they certainly indicate that fact. They also show that Globe is returning cash to investors. As well as retiring shares, the company pays a small dividend. The yield currently stands at 0.8%.
If this business is so profitable, then why does Buffett not own more? After all, it seems to be well run and located in a sector he likes.
One explanation for this could be that Buffett has said he's not particularly interested in life insurance because it's not very profitable. As he noted at Berkshire's 1999 annual meeting:
"The problem with the life business is that it isn't very profitable β and you can look at the records of the big companies on that β and that a lot of the activity in the area is, in some way, equity-related. And Charlie and I have never wanted to get in the business of managing equities for other people. I mean, we want our sole interest on equities to be Berkshire Hathaway itself. So, we do not want to wear two hats.
...
But it's a business we understand. So, we're β we'd be perfectly willing to be in the life insurance business if we thought there was β if we had a way of doing it where we thought there was reasonable profitability attached to it."
I could speculate that buying Globe in the first place was Buffett's way of gaining some exposure to the life sector without exposing Berkshire to too much risk.
If so, it was an astute decision. Over the past 10 years, shares in the company have produced a total annual return of 13%, and over the past 15 years, the stock has returned 10% per annum.
Neither of these are market-beating returns, but they are fairly solid performances from a life insurance company.
Based on Wall Street estimates, shares in Globe are currently changing hands at a forward price-earnings multiple of 13.4 and price-to-book value of 1.3.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Charlie Munger's Daily Journal Buys Alibaba
- Why Buying Blue Chip Stamps Was One of Buffett's Best Deals
- Why It Is Sometimes Worth Paying a High Price for a Business
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