GEICO has been one of Warren Buffett’s best investments for Berkshire Hathaway (NYSE: BRK A); and a major reason he favors insurance companies is the free cash flow makes them ideal for any investing objectives such as retirement planning, saving for college, or day trading. GEICO was nearly bankrupt in the late 1970s. twenty years later, GEICO became a wholly owned subsidiary of Berkshire Hathaway, which is headed by Warren Buffett. GEICO is now the third largest direct writer of private auto insurance in the United States. Two dividend paying small cap insurance companies for investors looking for their own GEICO that are suitable for retirement planning, saving for college, or day trading are RLI Corp (NYSE: RLI) and Tower Group inc (NASDAQ: TWGP).
No stock would be suitable for an IRA, college savings plan or day trading unless it had strong fundamentals, like GEICO. on May 17, Fitch Ratings affirmed the solid foundation of RLI Corp. Insurer Financial Strength (IFS) ratings of an “A plus” were given for the operating subsidies of RLI Corp. The ratings reflect “…the solid balance sheet, conservative practices and adequate capitalization” of RLI Corp.
For day trading, retirement planning or saving for college, the Tower Group is just as strong. recently, TheStreet ratings upgraded the Tower Group to a “buy.” Cited were the “robust revenue growth, increase in stock price in the last year, compelling growth in net income, attractive valuation levels and notable returns on equity.” Like GEICO and RLI, Tower Group offers to an investor a solid company with strong financials.
What sets both RLI Corp and Tower Group apart from GEICO is the dividend yields. TWGP pays a dividend of 3.19 percent. RLI Corp has a dividend yield of 2.01 percent. GEICO is part of Berkshire Hathaway, which does not pay a dividend. Paying a dividend makes Tower Group and RLI Corp suitable for income based day trading. in addition, the dividend income is tax free if the stock is held in a retirement account such as IRA, Roth IRA or 401k.well run insurance companies such as RLI Corp, Tower Group and GEICO are cash generating machines. GEICO, Tower Group and RLI Corp take in premium income, invest it, and pay off policies. The time value of money is on the side of an insurance company, and its shareholders. Warren Buffett invests in this phenomena, which results in GEICO producing capital to finance more acquisitions for Berkshire Hathaway and reward its shareholders. Like Berkshire Hathaway’s with GEICO, the shareholders of Tower Group and RLI Corp. also benefit from owning stock in a well run insurance company.