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.
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.
Takeovers are impossible to predict, but buying quality shares over the long term can get you to happy millionaire status before you retire.
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Alan Oscroft 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.