Insurance companies have been weighed down since recent turbulence in the stock market kicked off in the second week of March with the collapse of Silicon Valley Bank, with many share prices at around a 10% discount to where they were trading a month ago.
So we asked two Fools to name their favourite shares in the sector right now, and why. As ever, note that returns are not guaranteed and past performance is not a reliable indicator of future results.
Legal & General is highly profitable
By Christopher Ruane: What makes for a good insurance business?
Like any business, it needs to attract customers. In that regard, I think Legal & General’s (LSE:LGEN) iconic brand and long history are a strong competitive advantage.
It needs to underwrite profitably. Legal & General focuses on lines like life insurance rather than more exotic lines like catastrophe insurance. That means its policy claim costs from year to year should fall within a fairly well-defined range rather than be low for years on end then suddenly skyrocket. The business made a post-tax profit of over £2bn last year.
Despite that, this insurance stock has a market capitalisation of under £14bn. That means it trades on a price-to-earnings ratio of around 6, which I see as excellent value. If I had spare cash to invest right now, I would add the shares to my portfolio.
Legal & General is in the business of managing risks but faces some of its own. Volatile stock markets could hurt investment returns. That might be bad for profitability at both the insurance and investment management divisions of the firm.
How could investing in such a business benefit me as a shareholder?
The key attraction for me is the company’s dividends. The yield is currently 8.5%. While dividends are never guaranteed, Legal & General has set out a strategy that anticipates annual dividend increases of around 5% over the next couple of years. Its large profits mean that such a payout will be comfortably covered, if it can maintain its current business performance.
Christopher Ruane has no position in Legal & General
Admiral: best-in-class underwriting
By Stephen Wright: I think Admiral (LSE:ADM) is the best of the UK insurers. To see why, think about the two ways insurance companies make money.
The first is by underwriting – paying out less in claims than they collect in premiums. The second is by investing their float – in the style of Warren Buffett’s Berkshire Hathaway.
It’s in the underwriting division where I think Admiral clearly stands out. Profits here are measured by the combined operating ratio.
The combined ratio adds the company’s expenses and divides them by premiums. A lower number is better and 100% is break even.
A look at the combined ratio for the broader motor industry illustrates how difficult underwriting has been for insurers. But the story for Admiral is quite different.
| Combined Operating Ratio | ||
| Year | Admiral | Industry |
| 2022 | 102 | 106 |
| 2021 | 73 | 97 |
| 2020 | 69 | 91 |
| 2019 | 80 | 101 |
| 2018 | 82 | 94 |
| 2017 | 80 | 97 |
| 2016 | 91 | 109 |
| 2015 | 81 | 104 |
| 2014 | 83 | 101 |
| 2013 | 83 | 100 |
This kind of outperformance doesn’t happen by accident. Admiral has managed to achieve this by leaning into technology, data and AI to help find the most profitable risks to insure.
In 2022, the company’s combined ratio climbed above 100%, largely due to inflation. And I see inflation as the biggest risk for the company’s profitability going forward.
Higher used-car prices and more expensive repairs might be a headwind in the near term. But I think Admiral is the best British insurance stock for investors to buy for the long term.
Stephen Wright owns shares in Berkshire Hathaway.
