As chairman and chief executive of Berkshire Hathaway — as well as its largest shareholder — it’s sometimes hard to distinguish between Warren Buffett and ‘his’ company. But even though the two aren’t the same, I think the American billionaire remains hugely influential in formulating its strategy.
And in 1967, I’m sure he had a major say in the company’s decision to take its first position in the insurance industry. Today, the sector’s an important contributor to the group’s results. For example, in 2024, insurance underwriting and investment income accounted for 47.8% of Berkshire’s operating earnings of $47.4bn.
An unusual business model
But the sector has one unconventional feature which Buffett highlighted in his 2024 letter to shareholders. He pointed out that insurers receive payment up-front not knowing – until much later — how much it will cost them to provide that level of cover. He gave the example of continuing to pay asbestos claims over 50 years after the premiums stopped being collected.
This is clearly a major risk. But insurers (and their shareholders) can’t have it all their own way. Occasionally, they’ll have to settle large claims. But most of the time they don’t, which is when they can make good money.
This side of the Atlantic
Like the American billionaire, I like to invest in blue-chip stocks close to home. For me, that means the FTSE 100. And the index has plenty of impressive insurance stocks to choose from.
For example, Admiral (LSE:ADM) appears to be doing something right. Since July 2024, its share price has risen 29%. Over the past five years – from July 2020 – it’s up 46%.
The group offers motor, household, travel and pet insurance products. In addition, it provides personal lending services, although its interest rate seems on the high side so I’m not sure how popular its loans are likely to be. However, the group’s probably best known for car insurance. In the UK, it insures 5.7m vehicles. It was the first to introduce multi-car insurance.
A strong performance
Admiral had an excellent 2024. Compared to a year earlier, group turnover was 28% higher and pre-tax profit increased 90%. Much of this growth came from its motor insurance division.
With earnings per share of 216.6p, the stock currently (4 July) trades on a reasonable historical price-to-earnings ratio of 15.4.
Despite the strong share price performance, its yield remains healthy. Based on amounts declared in respect of its 2024 financial year, the stock’s offering a 5.8% yield. However, it must be pointed out that its payout has been erratic over the past five years – 192p (2024), 103p (2023), 157p (2022), 279p (2021) and 177p (2020).
Berenberg bank has the stock as one of its top picks in the European insurance sector.
And RBC Capital Markets raised its price target to 3,800p (around 14% higher than it is today) after the insurer published its 2024 results.
But the sector’s highly competitive and we’ve seen there can be a mismatch between the timing of receipts and payments, particularly with motor-related personal injury claims.
However, on balance, I think Admiral could be considered by investors for possible long-term gains.
