3 Insurers Yielding 4% Or More: Direct Line Insurance Group PLC, Amlin PLC And Esure Group PLC

Direct Line Insurance Group PLC (LON:DLG), Amlin plc (LON:AML) and Esure Group PLC (LON:ESUR) are three general insurers with attractive valuations and high dividend yields.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Insurance stocks can make a valuable contribution to your dividend portfolio. Unlike banks, insurance companies tend to be less cyclical, as the demand for insurance is generally stable over the business cycle. This stable demand base and the less risky investment strategy employed by them allows them to generate relatively stable patterns of earnings, which in turn enables them to make consistent dividend payments.

We will look, in particular, at three general insurance companies, because of their attractive dividend yields and relatively low P/E valuations. The low valuations attached to these companies partly reflects the uncertainty surrounding the impact of Solvency II on their capital ratios, which could affect their dividend payouts. Difficult market conditions is another factor, as premiums remain low because of aggressive competition and as customer retention falls. Although competition is expected to remain fierce, there are some signs of a bottoming in the market, particularly in UK motor, as some insurance companies are looking to withdraw capacity from the market.

Direct Line Group

Direct Line (LSE: DLG) has a regular dividend yield of 4.0%, based on its regular dividend of 13.2 pence per share paid in 2014. But with the cash proceeds of £430.5 million from the sale of its international division, Direct Line does appear to be holding excess capital. This could mean the group could quite likely make further special dividend payments. It had made two special dividends in 2014, totalling 14 pence per share. Direct Line trades at a forward P/E ratio of 12.1.

Despite having two very well-known brands, including Direct Line and Churchill, the group has seen its market share fall in its motor and home insurance markets. But as the insurer ceded market share to its competitors, its profitability had improved significantly. This was also helped by its cost-cutting programme, with expenses falling faster than the net reduction in premiums. Its combined ratio, a measure of underwriting profitability, rose 0.2 percentage points to 95.0% for 2014. This follows a 2.6 percentage point improvement in the previous year. A combined ratio of below 100% represents an underwriting profit. Management expects the combined ratio, absent from major weather events, would lie between 94% and 96% in 2015.

Amlin

Amlin (LSE: AML), unlike the other two insurers, focuses on commercial and speciality lines of insurance. Similar to home and personal motor insurance markets, pricing has come under pressure, with average rates falling. However, underwriting profitability is generally stronger, because of the more complex nature of risks insured. Amlin produced a combined ratio of 89% in 2014, having worsened from 86% in 2013. The insurer paid a regular dividend of 27.0 pence per share in 2014, which represents a dividend yield of 5.6%. Amlin trades at a forward P/E ratio of 11.6, and has a forward dividend yield of 5.9%. Its dividend cover for 2015 is estimated to be 1.46x.

esure Group

esure Group (LSE: ESUR), with a market capitalisation of £1.02 billion, is the smallest of the three. Similar to Direct Line, esure focuses on motor and home insurance markets. esure’s combined ratio worsened by 2.5 percentage points to 92.4% in 2014, as the cost of claims rose. Although earnings per share is expected to fall by 4.5% in 2015, the earnings decline is modest and temporary. Its valuation is attractive though, especially with the prospect of premium rate increases in the UK motor market. The insurer’s forward P/E ratio is 12.8, and has a forward dividend yield of 6.4%. Dividend cover is expected to fall to 1.21x, from 1.29x in 2014.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »