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Is Warren Buffett's Recent Stock Selling Sending a Silent Warning to This Industry?

Motley Fool - Sun Dec 3, 2023

Berkshire Hathaway(NYSE: BRK.A) (NYSE: BRK.B) has been an excellent stock for longtime investors. Since Chief Executive Officer Warren Buffett took Berkshire's reins in 1965, Buffett and his team have delivered phenomenal returns of 19.8% compounded annually. These returns have crushed the S&P 500 index, which has delivered investors a solid 9.9% annual return in the same period.

The conglomerate's success is a big reason investors pay close attention to its 13F filing, showing its buying and selling activity in a given quarter. The Securities and Exchange Commission requires this filing from institutional investors, and it can provide us with some insights into what the best and brightest on Wall Street are doing.

In the third quarter, Berkshire reduced its stake in several stocks, many of which were long-term holdings. Included in the selling activity were several insurance stocks. Could this selling be a silent warning to the industry? Let's dig in and find out.

Berkshire Hathaway CEO Warren Buffett.

Image source: The Motley Fool.

Berkshire Hathaway's selling included several insurance stocks

Buffett is a longtime fan of owning insurance companies and has previously said that insurance companies are "a very large chunk of Berkshire's value." Buffett credits his first insurance investment in National Indemnity in 1967 for helping turn around Berkshire Hathaway, an ailing textile maker. Today, the company owns several insurers, including GEICO, General Re, Berkshire Hathaway Reinsurance, and Alleghany.

Given Buffett's affinity for insurance, it was a little surprising to see Berkshire Hathaway dumping shares of several insurance companies during the past two quarters. In the second quarter, Berkshire sold its position in Marsh & McLennan, the insurance broker and workplace advisor it initially purchased in 2020.

Berkshire also sold 5.5 million shares of Globe Life, or about 87% of its total position coming into the year. Globe Life, the life insurer known as Torchmark until 2019, has been a part of Berkshire's portfolio since 2001. It also sold shares in Markel (312,946 shares, or 66% of its stake) and Aon (235,000 shares, or 5% of its stake) in the quarter.

Here's one reason Buffett and his team may have sold insurers

It's possible that Buffett and his team, including Todd Combs and Ted Weschler, don't see as much upside in insurance stocks. Like many industries, the insurance business is cyclical. However, it doesn't necessarily follow the typical business cycle. Instead, insurers go through cycles, depending on the claims costs and competition in the marketplace.

Insurers have dealt with rising claims costs for several years, resulting in a "hard" insurance market. In this environment, insurers must raise premiums to cover those rising claims costs. Additionally, fewer insurers are competing for business, allowing these companies to raise premiums without losing too much business. Claims costs have risen for several reasons, including increasing climate-related disasters, inflationary pressures, and increased litigation against insurers.

According to Marsh & McLennan's Globe Insurance Market Index, which measures global commercial insurance premium pricing change at renewal, pricing increases for insurers have gradually come down since peaking amid the pandemic and could be signs of a softening insurance market.

A chart shows Marsh & McLennan's Global Insurance Market Index, which shows the year-over-year change in global insurance composite prices.

Experts expect the pricing environment for insurers to continue softening. Reinsurance, or insurance that insurers buy to protect themselves against catastrophic losses, can be a good indicator of the overall pricing environment for insurance companies. Fitch Ratings expects reinsurance rates to continue rising in 2024, albeit slower than this year, with prices falling in 2025.

Investors shouldn't be too concerned about Berkshire's selling

A slowdown in price increases is a welcome sign for individuals and businesses, which have seen premiums rise significantly since the early days of the pandemic. For insurers, it means they won't be able to grow quite as quickly and may have to compete among each other for business in a less favorable pricing environment. If insurers sell off from here, it could be an intriguing opportunity for investors.

Kinsale Capital is one insurer that has performed well. While its valuation is a little higher, if the stock were to sell off much from here, it could be an excellent stock to buy the dip on. Progressive is another example of an outstanding insurance stock that has performed well for decades because of its long-term commitment to underwriting profitable policies. Finally, Marsh & McLennan's business has performed well across multiple recessions since 1962.

For insurance stock investors, I wouldn't be too concerned about Berkshire's selling activity. The conglomerate still holds several private insurance companies, including GEICO and Alleghany. However, Berkshire's selling is a good reminder to invest in high-quality insurers that can perform well across different cycles.

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Courtney Carlsen has positions in Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway, Kinsale Capital Group, and Markel Group. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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