The insurance sector has suffered since the EU referendum, but do today’s results throw up a bargain?
Insurance too cheap?
Admiral Group (LSE: ADM) shares fell 9% in the days following the vote but the shares have since rebounded by 13%, to 1,069p.
That share price performance does, however, include a 7.5% drop so far today on the occasion of the company’s first-half results. So what’s gone wrong? The apparently good news was a 4% rise in pre-tax profit to £193m, with earnings per share up 2% to 55.9p — and the interim dividend has been raised by 23% to 62.9p per share as the company returns excess cash to shareholders.
But the hit came from, yes, Brexit, with Admiral telling us that the resulting market volatility “has adversely impacted the group’s solvency position at the end of the first half,” and that there could well be more Brexit trouble ahead.
Is Admiral a buy at today’s share price? The expected dividend yields of better than 5% do look attractive — there’s still quite a bit more spare cash to hand back to shareholders. But with the shares on forward P/E multiples of around 20, I think there are better insurance bargains out there, also with tempting dividends.
Top choice?
My own choice is Aviva (LSE: AV), which I’ve liked for some time — though I’m down since I bought some, and Aviva shares have been in the doldrums for a couple of years.
Aviva is more of a general insurer with its own fund management side, so we’d expect more risk to be faced should the UK’s financial sector lose any of its European ‘passporting’ privileges. That suggests the share price fall since the Brexit vote is perhaps more to be justified — it did slump 22% in the following days, but has since recovered to just a 6% loss.
But I disagree with the negative sentiment. Aviva was the first to assure the markets, telling us the day after the vote that it considers Brexit “will have no significant operational impact on the company.” And in first-half results released on 4 August, the firm made the point that “following the Brexit vote” its key measures remain strong — and analysts are still expecting strong earnings growth.
A solid alternative
Legal & General (LSE: LGEN) is another of my favourites, and it too suffered — an immediate 30% fall, recovering to a more modest 10.5% drop. And it also was quick to reassure shareholders in the days after the vote, pointing out that its strategy had already been based on the assumption of a 50% chance of a leave vote. It said it had prepared by taking some derisking actions intended to “mitigate our balance sheet against the downside risk” of a Brexit result.
Again, first-half results looked good, with profits and cash generation up and the firm’s solvency measures impressively strong. And though the company wrote of “significant market uncertainty and volatility” in the time since the referendum, it also assured us that its “balance sheet has demonstrated its resilience.“
Aviva is now on a forward P/E mutliple of around 9.5 with a 5.6% dividend yield forecast, with Legal & General’s P/E a little over 10 and its predicted dividend yield at 6.7%. Both of those look like better buys than Admiral to me right now.
