Insurance. It’s an unexciting industry, and one that I don’t often write about. But after all of the volatility and crashes we’ve had in recent years, I think that’s a good thing. And world-renowned investor Warren Buffett loves this industry, which comprises a substantial part of the Berkshire Hathaway empire.
So here are two of my top picks in this sector, one a market leader and the other that’s taking price comparison insurance around the world.
Admiral
Admiral Insurance Group (LSE:ADM) was created in 1993 as a start-up business with 57 employees, headquartered in South Wales. Since then it has grown rapidly. It now has businesses in Spain, Italy, France and the US, and is one of the leading online and price comparison insurance companies in the world.
The appeal of this firm is that it’s an incredibly lean and efficient organisation. And in many ways it represents the future of the insurance industry. Almost everything is internet-based, and Admiral is building a whole host of online insurance brands, including confused.com, l’olivier and Bell.
Take-up of online insurance and price comparison sites is lower in countries such as Spain and France compared to the UK, and so there’s substantial potential for growth. And Admiral’s low cost base means that it can pay out a big proportion of its profits as shareholder dividends.
The share price has been trending steadily upwards ever since the lows of the Eurozone crisis, and the stock now stands at a trailing P/E ratio of 21, with a dividend yield of 2.12%.
Direct Line Insurance
Spun out from Royal Bank of Scotland in 2012, Direct Line Insurance Group (LSE:DLG) doesn’t have the international reach of Admiral, but it represents the leading insurance name in the UK. And this is a company that has been going from strength to strength in recent years. As well as the Direct Line brand, it owns Churchill and Green Flag. It has 14% of the UK motor insurance market, and 17% of the UK home insurance market.
Direct Line has always been one of Britain’s premium insurance companies, and this has given the business pricing power that it has used to increase profitability. Today it remains Britain’s most preferred brand. The company has also been steadily reducing costs, and thus improving the bottom line, and it has also taken advantage of rising car insurance premiums.
The firm is also working on being at the forefront of evolving trends such as telematics.
Earnings per share have progressed from 22.58p in 2013 to 27.6p in 2015. And the share price has been on the up since the IPO.
What’s more, this is a share that’s still cheap, with a trailing P/E ratio of just 11, and a dividend yield of 3.55%. And as well as earnings growth, the dividend has been rising steadily year-on-year. Since the IPO, Direct Line has paid out more than £1.5bn in income.
That’s why I think this company is an even better bet than Admiral.