Top Insurance Stocks For 2016: Admiral Group plc, RSA Insurance Group plc & Lancashire Holdings Limited

Should you buy Admiral Group plc (LON:ADM), RSA Insurance Group plc (LON:RSA) & Lancashire Holdings Limited (LON:LRE) for growth and income?

| 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.

The outlook for insurance stocks in 2016 is looking very promising. Such stocks are trading at low valuation multiples, despite having some very attractive income and growth prospects. Robust economic growth in the UK and US is expected to lead to steady volumes growth, while strong balance sheets should mean dividend payouts in 2016 are set to grow.

With this in mind, I’ll take a look at three of the strongest picks from the sector.

Industry-leading combined ratios

Admiral Group (LSE: ADM) is one of the most promising insurance companies, despite the fact that it operates in the highly competitive UK motor insurance market. This is because while many of its competitors are barely profitable on an underwriting basis, Admiral has a combined ratio of 82.7%. A combined ratio of less than 100% indicates the company is making underwriting profits.

Admiral also continues to grow faster than many of its competitors, with customer numbers rising 6% to 4.19 million in the first half of 2015. The combination of Admiral’s industry-leading combined ratio and its strong volume growth demonstrates the insurer’s competitive advantage.

With shares trading at a 16.1 multiple on its 2015 estimated earnings per share of 98.9p, Admiral is more expensive than its peers. But, as the company is highly cash generative, it can afford to pay a prospective dividend of 96.2p per share this year, which equates to an attractive dividend yield of 5.9%.

Turnaround play

RSA Insurance Group (LSE: RSA), which has been embroiled in a major accounting scandal at its Irish division, is a potentially undervalued turnaround play. The insurer, which is the second largest in the UK general insurance market, is in the midst of a three-year restructuring drive. Its strategy is to focus on core markets in the UK, Scandinavia and Canada, cut costs, shore up its balance sheet and improve the operational side of the business.

The insurer is already showing the green shoots of recovery, and the improvement in performance is exceeding market expectations. Operating profits increased 84% to £259m in the first half of 2015, and its combined ratio fell to 96.9%, from 100.3% last year. Analysts expect RSA will deliver underlying EPS of 32.7p per share for the full year, which gives its shares a very reasonable forward P/E of 13.8.

Potential takeover target

Specialist insurer Lancashire Holdings (LSE: LRE) is a potential takeover target because of its strong underlying profitability, low valuation multiples and its presence in the Lloyds of London market. Two of its rivals, Catlin and Amlin, have already been acquired by larger foreign insurance groups this year. And, further industry consolidation of Lloyds insurers is likely as the sector is cash-rich and low interest rates have made financing deals cheap.

Recent weakness in its share price could make a potential deal much more likely. Lancashire’s shares have fallen 8% since the start of December on news that CEO Peter Scales and CFO John Lynch of Cathedral, its Lloyds of London subsidiary, would be leaving the company on 31 March 2016. Both directors are founding partners of Cathedral and have been in their positions since 2000.

With shares trading at a forward P/E of 12.5, or 1.5 times tangible book value, Lancashire is cheap. By contrast, Mitsui’s £3.5bn bid valued rival Amlin at 2.4 times tangible book value, with a forward P/E of 17.0.

And even if a takeover bid doesn’t come along, shareholders will likely be well rewarded by its dividend prospects. Analysts expect Lancashire to pay shareholders a dividend of 64.6p per share this year, which equates to a prospective dividend yield of 9.9%.

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

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »