Does the insurance sector seem cheap to you? It does to me, and it certainly seems to look cheap to Mitsui Sumitomo Insurance of Japan after its all-cash buyout offer for Amlin (LSE: AML) — at a 36% premium to its market price on 7 September. The Amlin board said it will recommend the 670p-per-share deal, and that pleased ace investment manager Neil Woodford who sold £30m’s worth in the days after the announcement at a nice profit.
But is Amlin a one-off and is Mr Woodford the only one to spot an insurance bargain? I don’t think so.
Amlin was cheap
Amlin’s current share price of 655p puts the shares on a forward P/E of a little under 16 based on forecasts for the year to December 2015, and drops the predicted dividend yield to 4.3% — on the day before the bid, we were looking at a forward P/E of under 12 with a dividend yield of 5.7%. You might thing the current valuation is a little too high (and I’d agree, and I reckon Mr Woodford did exactly the right thing in taking some profits), but the pre-bid valuation was seriously too low.
Amlin is also now priced at a premium of 80% to net asset value, up from a prior excess of below 40% — and again, that share price just 40% ahead of net assets seemed to undervalue the earnings growth potential of the company to me.
Looking at a few others, at 1,534p, motor insurer Admiral (LSE: ADM) shares are valued at seven times net assets or so. But that’s probably a less meaningful measure for a motor insurance specialist, and we’re also looking at a forward P/E similar to that of Amlin (post-bid) of a bit under 16. There’s a dividend yield of 6% on the cards, but it would barely be covered by earnings.
Admiral is harder to value, I think, but I don’t see predators queuing up for a bite here.
Better value?
But if we have a look at Direct Line (LSE: DLG) at 361p, we see a similar 80% share price premium over net assets as at Amlin post-bid, but a lower forward P/E of only a little over 12. Direct Line has been paying handsome special dividends on top of its normal annual dividend, but even the latter alone looks set to deliver better than 5.5%.
Are any global insurers powerhouses looking at Direct Line and licking their lips? They could do worse.
Finally we come to RSA Insurance (LSE: RSA), whose shares are changing hands at 506p, and that puts them at a mere 30% premium to net assets — even lower than Amlin before Mitsui swooped. RSA’s P/E ratios aren’t obviously low, with a multiple if 17 for this year dropping to 15 based on a forecast 11% rise in EPS in 2016. And predicted dividend yields are relatively low at 2.1% this year and 2.9% next, but they would be covered 2.8 times by earnings this year and 2.3 times next — and that leaves room for the dividend yield to be doubled while still sticking to Amlin’s levels of cover.
A long-term approach
On the whole, I certainly see bargains in the insurance sector. I wouldn’t buy in the hope of takeover bids as that’s something that really can’t be predicted at all. But I wouldn’t be surprised to see more consolidation as the sector continues its recovery — and if you buy with a Foolish long-term view, a bid might even see your ambitions realised quicker than you think.
