Value Investing

Warren Buffett’s Favorite Life Insurance Company

At the end of 1951, a young Warren Buffett penned an article for the Commercial and Financial Chronicle titled, The Security I Like Best. This article profiled a little-known company called GEICO, which was at the time the young investor’s most substantial shareholding.

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Alex Roepers

Following this initial article, over the next decade, Buffett wrote four more pieces on the cheap stocks he liked, giving us a great insight into the young Buffett’s investing mentality and process.

Warren Buffett's Favorite Life Insurance Company

In 1957 he wrote up a company called Home Protective Co, which was In his opinion “the last undiscovered equity security of a major life insurance company.”

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This group owned just under 99% of the outstanding stock of the Home Life Insurance Company of America “a leading Pennsylvania insurer with over 400,000 policyholders.” Buffet writes that while this company “had a very dubious financial position” some “years back” management had cleaned up the business and invested the bulk of assets in government-guaranteed mortgages helping to boost the average rate earned on asset from 2.04% to 3.6% “This gain based on present assets of $1,100 per share amounts to over $16 per share annually.” Buffett goes on to say that with a balance sheet comprised almost entirely of fixed-income assets, 0.5% or 1% change in interest rates represents a $5.50 per share change in earnings power. “While it takes considerable time to be fully effective,” he writes, “ we have witnessed such a change within the past year, and it has not yet been reflected in Home’s earnings.”

Overall, for the year ending 1956, the insurance company earned $22.6 per share and was trading at $85 in the over-the-counter market giving a P/E ratio of less than four. Between 1952 and 1956, earnings per share nearly doubled. “A continuation of such increases which appears likely added to greater investor recognition should provide substantial capital gains to today's buyer” Buffett opines after summarising Home’s steady earnings growth.

As well as it's steady growth and balance sheet earnings power, Home also possessed a “kicker” in the form of large holdings of undeveloped land on the Main Line in Philadelphia. "Given proper zoning, such holdings can have substantially greater value, particularly when related to only 61,463 shares outstanding" Buffett’s article concludes.

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