Keen investors may have noticed that Warren Buffett is a big fan of the insurance sector. That’s at least partly because the business entails insurance companies receiving income from customers, investing it, then paying out roughly the same in claims as they received, while keeping the returns from the investments. If payouts for claims increase, premiums go up and this means that, in the long run, insurance can prove to be a very profitable space.
Valuations
Despite this money-making potential, insurance companies in the FTSE 100 continue to offer excellent value for money. In fact, while the FTSE 100 is at an all-time high and there are question marks regarding its potential to move higher throughout the course of the year, the insurance sector holds tremendous opportunity.
For example, Aviva (LSE: AV) (NYSE: AV.US) currently has a price to book (P/B) ratio of just 1.75, which indicates that its shares could move significantly higher. Furthermore, Aviva has a price to earnings (P/E) ratio of just 11.6, which is considerably lower than the FTSE 100’s P/E ratio of 16. In fact, if Aviva were to have the same P/E ratio as the FTSE 100, it would mean its shares trading an incredible 38% higher than their current level and, with Aviva’s bottom line set to grow by 16% next year, it is difficult to justify such a low valuation versus the wider index.
The same is true of Prudential (LSE: PRU) (NYSE: PUK.US). Certainly, there is uncertainty regarding its new CEO and the strategy that will be employed moving forward. However, the company’s share price appears to more than fully reflect this risk, with Prudential having the potential to become a top notch income play in future.
In fact, while Prudential currently yields just 2.4%, it has increased dividends per share at an annualised rate of 10.8% during the last five years. This rate of growth shows little sign of slowing, with Prudential expected to bump up dividends by 12% next year and, looking ahead, a continuation of this trend seems likely and could push the company’s share price much higher.
Certainly, there have been strong performers within the insurance sector. For example, shares in Direct Line (LSE: DLG) have risen by 35% in the last year but, as with Aviva and Prudential, they could have much further to go. That’s because Direct Line trades on a P/E ratio of just 12.2, which indicates that investor sentiment could pick up markedly. And, with the company’s shares having a beta of just 0.6, it could prove to be less volatile than the wider index and, therefore, a relatively defensive option.
So, while many investors may feel that the FTSE 100 could be due a pullback, Aviva, Prudential and Direct Line show that there is still excellent value for money within the insurance sector. And, with bright futures and excellent dividend potential, all three companies could boost your returns over the medium to long term.
