The insurance business is cyclical, erratic, volatile… but that’s why I like it.
Over the long term, I see insurance as a solidly profitable business, though short-term ups and downs are a key part of the business itself. That gives us opportunities to buy when companies are looking undervalued, as I think a number of them are right now.
Warren Buffett is big on insurance too, and he’s made it clear he’s eyeing up investments on these shores.
Insurance bargain?
Mr Buffett has famously said he prefers to buy great companies at fair prices, as that’s a route to securing long-term wealth generation, and RSA Insurance Group (LSE: RSA) strikes me as a candidate.
The market is tough right now, but chief executive Stephen Hester describes Q1 results as “in line with our demanding plans for the period,” adding that “extensive underwriting actions are also on track, responding to 2018’s challenges.”
Net written premiums rose by 3%, coming out flat on an adjusted basis. Operating profit was up on the same quarter a year ago, while weather losses, large losses, attritional losses and controllable expense ratios were all better than last year.
Tangible net asset value per share hasn’t changed, and at 279p represents about half the current share price.
Steady progress
In all, Thursday’s update wasn’t a glowing success story, but more a tale of a strong company that’s doing as well as can be expected in the current climate. And with the share price having dipped 14% over the past 12 months, I think I’m seeing an attractive income play here. We’re looking at P/E multiples of 10-11, and well-covered dividend yields of 5.7% forecast for this year and 6.5% next.
On top of that, I rate CEO Stephen Hester (who guided the successful restructuring of RBS) as one of the best in the FTSE 100 — and Warren Buffett looks for quality management.
Best in sector?
It’s pretty much impossible for me to think about Warren Buffett and about insurance without Prudential (LSE: PRU) coming to mind. In Prudential, I’m convinced I’m looking at the UK’s safest long-term insurance pick — it doesn’t have that name for nothing.
It is pretty much a byword for conservative management, and it has a tradition of keeping its dividend yields modest but with very strong cover by earnings. I’ve generally thought of it as a company that offers yields of around 2%-2.5% per year, but weakness in the insurance sector has pushed its forecast yield for this year up to 3.5%, with 2020’s reaching 3.7%.
Low valuation
What’s more, the share price has lost 15% over the past 12 months, and that’s left the shares on a forward P/E multiple of only 10 for this year, dropping to nine a year later. In the past, the Pru has attracted a premium rating compared to its peers because of its long-term reliability, and unless there’s something wrong with the company right now, I see that rating as just too cheap.
And I don’t see anything wrong, after 2018 results showed in a 6% rise in operating profit, with net assets and other figures up and healthy across the board. The only uncertainty I can see is the planned demerger of M&G Prudential, but I don’t see how that could justify today’s low valuation.