You don’t often hear stock market pundits extol the virtues of insurance companies. To their way of thinking, the insurance industry is too stodgy to merit their attention.

Especially these days when tech stocks are all the rage. One reason why tech stocks are so popular is their scalability. They can quickly grow profits once they have proven the viability of their product.

That is not the case for insurers. The viability of their product was proven a long time ago. Archeologists have discovered written records of maritime insurance going back thousands of years. There is no scalability left in terms of product design. For that reason, it has become a commodity-type of market.

However, there is one aspect of the insurance business that is scalable. That is the money collected as premiums that exceeds the amount required to cover claims.

When interest rates are low, almost all the premiums collected must go into riskless investment pool known as a “statutory reserve.” The future value of those dollars does not increase fast enough to leave much excess to investment elsewhere. They pretty much keep pace with inflation.

But when interest rates rise, as they have been over the past two years, the future value of those dollars increases substantially. That unlocks some of the reserve money to be invested more aggressively. If those investments perform as expected, an insurer’s balance sheet can rapidly expand.

That has been the case for the past year. During the second half of 2023, interest rates peaked and started declining while the stock market rallied.

That freed up money for insurers to invest in stocks, which immediately appreciated in value. When insurers release their Q4 results soon, I expect many of them to report good news.

Feeling Chubby

Evidently, Wall Street agrees with me. Consider Chubb (NYSE: CB), a huge insurer with considerable financial reserves. After bottoming out below $184 last June, it traded above $240 this week to hit a new all-time high.

That equates to a 29% gain in just seven months. Over the same span, the SPDR S&P 500 ETF Trust (SPY) gained only 11%.

How did a “stodgy” insurance company outperform the overall stock market? By unlocking money that was mostly trapped in U.S. treasury securities and putting it to work in higher yielding securities.

Bear in mind, the money still stuck in bonds is earning more than twice the yield it was getting two years ago. That means the return on Chubb’s entire investment portfolio has been growing at an accelerating rate since then.

Chubb is scheduled to release its fiscal 2023 Q4 and full-year results on January 31. Wall Street is expecting those numbers to meet or exceed Chubb’s strong Q3 numbers, which included a 162% jump in per share net income.

In that press release the company noted, “Pre-tax net investment income in the quarter was $1.31 billion, up 34.2%, and adjusted net investment income was $1.41 billion, up 34.2%. Both were records.”

Don’t be surprised if Chubb reports another record for pre-tax investment income for the fourth quarter, too. The company did not provide any guidance regarding its investment portfolio.

However, it is safe to assume that just about every security Chubb owns appreciated in value over the final two months of last year. Especially its bond portfolio, which declined by more than $2 billion during the third quarter due to rising interest rates.

Waiting for the Report Card

That is the scenario I envisioned five months ago when I recommended Chubb to my PF Pro subscribers. I said then, “If a recession does not happen and the economy continues to expand, Chubb could post equally strong results over the second half of this year.”

At that time, CB was trading around $200. In addition to recommending the stock, I also suggested a call option trade using the $200 strike price that expires this December (a call option increases in value when the price of the underlying security goes up).

Already, the intrinsic value of that options trade exceeds my limit price of $30. In fact, that option was trading around $50 at the start of this week. If I wanted to, I could have closed out that position for a 67% gain and been done with it.

I’m not going to do that. At the very least, I am going to wait until Chubb releases its Q4 and full year results next week. If that news is as good as I expect it to be, I may be able to close out that option position for a 100%+ profit.

Either way, this is the type of trade that I sometimes find while Wall Street is looking the other way. Chubb was hiding in plain the whole time, but it took some vision to see it.

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