The last five years have been truly stunning for the insurance sector. For example, shares in Beazley (LSE: BEZ), Prudential (LSE: PRU) and Standard Life (LSE: SL) have risen by incredible amounts, with them being up 156%, 184% and 125% respectively since April 2010. And, while Aviva (LSE: AV) (NYSE: AV.US) has struggled to keep pace with its sector peers during the period, its rise of 39% is still far in excess of the FTSE 100‘s gain of 22%.
Valuations
Looking ahead, there could be more outperformance to come from all four insurance companies mentioned above. That’s because, while they have performed well in the past, their valuations still indicate that wide margins of safety are on offer, which could cause their ratings to be increased over the medium term.
For example, Prudential trades on a price to earnings growth (PEG) ratio of just 1.1, which indicates that its shares could be due for an upward price movement. And, with it having a dividend payout ratio of just 36%, the company’s new management team could increase dividends at a rapid rate, thereby increasing its appeal as an income stock and pushing its share price higher.
It’s a similar story with Standard Life and Aviva. They both have PEG ratios of just 0.7 and, while there will inevitably be challenges ahead for Aviva as it seeks to integrate the Friends Life business into its own, this appears to be more than adequately priced in to the company’s valuation. And, with Aviva and Standard Life both expected to increase dividends at a rapid rate, they could be yielding as much as 4.7% and 4.8% respectively in 2016.
Meanwhile, Beazley is perhaps the odd one out of the four insurance companies. It is expected to see its bottom line fall in the current year, before growing by just 1% next year. While disappointing, the company’s share price includes a significant margin of safety, which is evidenced by Beazley’s price to earnings (P/E) ratio of 12.1. As such, and while its growth outlook may be relatively poor, Beazley’s share price could still move much higher.
Looking Ahead
Unsurprisingly, three of the four insurers here have betas of more than 1 (Beazley is the exception). This means that their share prices may be more volatile than the wider index, which makes sense since their profitability has a relatively high correlation with asset prices such as shares. So, there is a fair chance that their valuations could come under pressure in the short run – especially if there is a hung parliament and disorderly coalition/minority government.
However, if this is the case then it would most likely represent a great time to buy for the long term, since even lower prices for the same high quality businesses would represent an even greater margin of safety.
