The insurance industry was one of the main contributors to Warren Buffett's wealth because it generated significant amounts of cash every year and helped fund some of his other investments.
The Australian insurance industry has been under pressure in recent years thanks to devastating storms and very low premium price increases.
However, the industry seems to have turned a corner as premiums are now rising again. Firms like Youi and others were trying to steal market share by offering lower prices, although now they have the foundation to increase their prices which means the rest of the industry can too.
So perhaps this means the Australian insurance giants are worth a buy?
QBE Insurance Group Ltd (ASX: QBE)
QBE is an insurer with operations in North America, Europe, Australia, New Zealand, Asia and South America. It has a market capitalisation of $17 billion and its shares have been on a great run since 9 November 2016, growing by 32%.
It suffered significant damage during the GFC and is still a long way below its pre-GFC highs. Management hasn't done a good job of revitalising its overseas businesses, even though the GFC was over a decade ago. QBE has sold off some parts of its business but I don't think that is the way to find growth again.
In FY16 QBE's insurance profit decreased by 47%, cash profit after tax decreased by 39% and the dividend increased by 5%. Overall this wasn't a good result at all, the FY17 result will need to show reasonably strong growth for the market to grow the share price.
QBE is trading at 15.2x FY17's estimated earnings with a partially franked dividend yield of 4.11%.
Insurance Australia Group (ASX: IAG)
Insurance Australia Group has a market capitalisation of $14.6 billion, which makes it a little smaller than QBE.
Warren Buffett's Berkshire Hathaway took up a stake in the company in 2015, which is a big vote of confidence for any management team. In return for a $500 million stake, Berkshire Hathaway would receive 20% of consolidated gross written premiums and pay 20% of the claims.
Insurance Australia Group has a great stable of brands including NRMA Insurance, CGU, SGIO and SGIC which allows it to specialise in different insurance categories with each business.
In FY16 it grew insurance profit by 6.8%, but cash earnings decreased by 12.2% and the ordinary dividend reduced by 10.3%.
It remains to be seen if the Buffett deal is mutually beneficial, but with shares trading at 17.8x FY17's estimated earnings and on a grossed up yield of 6.02% it still looks reasonably attractive valuation wise.
Foolish takeaway
I think Insurance Australia Group shares would make a better investment out of the two as its dividend yield and track record are much more appealing than QBE's. If you want some strong blue chip shares instead of insurance ones, check out these industry powerhouses.
