Insurance coverage is considered one of Warren Buffett’s favorite sectors. At this time, he owns or has positions in an enormous variety of insurance coverage companies together with GEICO, Common Re, Nationwide Indemnity Firm, and Berkshire Hathaway Speciality Insurance coverage.

Right here, I’m going to elucidate why Buffett is so enamoured of the sector. I’ll additionally take a look at the way it’s throwing up some bargains for buyers to think about in the mean time.

Why Buffett loves insurance coverage

Buffett’s reference to the insurance coverage business started over 50 years in the past when he spent $8.6m to accumulate property and casualty insurance coverage enterprise Nationwide Indemnity. And since then, he has added much more insurance coverage corporations to his portfolio.

Earlier this yr, it got here to gentle that he had been shopping for shares in international insurance coverage big Chubb. Within the first quarter of 2024, he acquired 26m shares within the firm at a price of round $6.7bn.

The primary purpose he likes such companies is that they have an inclination to generate loads of money. In his phrases: “Somebody hands you money and you hand them a little piece of paper.”

He additionally likes the truth that money flows are typically fairly secure since insurance coverage corporations gather premiums regularly. This may be useful throughout financial downturns when different industries are experiencing turbulence.

In fact, Buffett realises that these corporations face dangers. The primary danger is that claims may be substantial at occasions. So, the problem for corporations on this business lies in precisely assessing future dangers and pricing insurance policies accordingly. That’s not all the time easy.

Low cost UK insurance coverage shares

Now, the excellent news for UK buyers is that many London Inventory Alternate-listed insurance coverage corporations are buying and selling cheaply in the mean time.

Authorized & Common, for instance, at present trades at simply 9 occasions subsequent yr’s earnings forecast. Equally, Aviva trades at 10 occasions subsequent yr’s earnings estimate.

One inventory that’s actually low cost, nonetheless, is Prudential (LSE: PRU). It at present trades on a forward-looking price-to-earnings (P/E) ratio of simply 7.7.

Now, this inventory has been an absolute canine not too long ago (I’d know as a result of I maintain it). That’s as a result of the corporate is targeted on Asia and Africa lately and its efficiency has been impacted negatively by the downturn within the Chinese language economic system.

Taking a long-term view right here, nonetheless, I see scope for a rebound. Growing international locations throughout Asia and Africa stay largely untapped from an insurance coverage perspective, so there’s loads of progress potential in the long term.

It’s price noting that final month, Prudential elevated its interim dividend by 9%. To my thoughts, that enormous improve signifies that administration stays assured in regards to the future.

The corporate additionally introduced a $2bn buyback. This implies that administration believes the inventory is reasonable.

The structural drivers of progress in Asia and Africa for our business stay intact, with ongoing sturdy demand in respect of safety, long-term financial savings and retirement propositions as broader based mostly financial progress returns to our markets. We proceed to be assured in reaching our 2027 monetary and strategic targets.

Prudential H1 outcomes

In fact, the weak financial setting in China stays a danger within the brief time period. When financial circumstances on the planet’s second largest economic system will enhance is anybody’s guess.

With the shares at present down greater than 60% from their highs and buying and selling on an excellent low P/E ratio, nonetheless, I just like the long-term danger/reward set-up right here.