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Are these insurers a safe haven in troubled markets?

Image: Aviva plc. Fair use.

So far, the UK market has reacted fairly calmly to the election of Donald Trump. It’s still early days, though. Mr Trump appears to be in a position to make big changes that could affect some UK-listed businesses.

Closer to home, Brexit remains another big unknown. Given such uncertainty, I think it makes sense to invest at least part of your portfolio in proven income stocks in defensive sectors.

Is growth slowing for this top performer?

One stock on my radar is Lloyd’s insurer Novae Group (LSE: NVA). This £516m FTSE Small Cap stock has a low profile among private investors, even though its share price and dividend have both doubled since 2010.

Despite this performance, Novae currently trades on a forecast P/E of 8, with a prospective yield of 4.3%. As a value investor, this modest valuation attracts my interest. So does today’s third-quarter trading statement raise any issues investors should beware of?

Novae’s gross written premium (equivalent to sales) rose by 15.8% to £717.4m during the first nine months of 2016. However, while Novae continues to expand, pricing power with existing customers appears weak. The group’s average renewal premium fell by 3.2% during the third quarter. Novae says this is the result of the firm investing in favourable sectors, while gradually withdrawing from less profitable areas.

There was nothing in today’s statement to alarm investors, in my view. What may be more of a concern is that the outlook for next year is somewhat uncertain. The latest broker forecasts suggest that Novae’s earnings per share could fall by 24% to 77.9p next year. A dividend cut of 8% is also expected.

These forecasts put the shares on a 2017 forecast P/E of 10, with a yield of 4%. I’m tempted to take a closer look, but I’d want to be reassured that Novae isn’t cutting rates in order to maintain revenue growth.

This big beast may be more reliable

If you’re unsure about Novae, FTSE 100 insurance giant Aviva (LSE: AV) could be a better choice.

Aviva’s operating profit rose by 13% to £1,325m during the first half of this year, while cash remittances rose to £752m, up from £495m during the same period last year. Full-year profits of £1,756m — or 49p per share — are expected, giving Aviva a forecast P/E of 8.7.

One major concern for Aviva investors is the firm’s dividend, which was cut in both 2012 and 2013. Although the payout hasn’t yet returned to the 26p level seen in 2011, chief executive Mark Wilson has delivered double-digit growth since 2013. This year’s payout is expected to rise by 11% to 23.1p, giving a forecast yield of 5.4%.

As a shareholder myself, I’m keen on dividend growth — but I am even more keen to see that the payout remains affordable and sustainable. So far, there don’t seem to be any signs of trouble. Aviva’s solvency coverage ratio, an important regulatory measure, was 174% at the end of June. That’s down slightly from 180% at the same point last year, but still towards the top of Aviva’s target range.

Mr Wilson’s focus on cash generation and sustainable growth has delivered good results so far. At current levels, I remain a buyer.

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Roland Head owns shares of Aviva. 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.