Why Aviva plc is still my pick of the insurance sector

I won’t try to hide the disappointment I felt when my investment in Aviva (LSE: AV) slumped in value in the days following the Brexit referendum.

Between voting day on 23 June and the evening of 27 June, Aviva shares lost 22%, and that’s got to hurt. But unlike many others who sold in panic, I didn’t because I saw no fundamental reason for our forthcoming departure from the EU to damage Aviva’s long-term prospects.

In fact, the very next day after the vote, Aviva told it had “conducted extensive analysis of the possible implications of a vote to leave the EU and considers it will have no significant operational impact on the company“.

I’m comforted by the fact that Aviva shares quickly recovered the loss and today stand 3% above their pre-referendum price at 457p, yet I feel for those who lost money by following the short-term panic. But what about now?

Aviva has two years of earnings forecasts on the cards, only slightly lowered since the City’s pre-Brexit prognostications, and that would put the shares on a P/E rating of 11 this year, dropping to under 10 on 2017 forecasts. On top of that, we’re expecting well-covered dividend yields in excess of 5%.

At first-half results time in August, Aviva reported a 13% rise in operating profit, with cash remittances up, and the interim dividend was lifted by 10%. Chief executive Mark Wilson told us that “We are growing in the UK, we are investing in the UK. We like the UK. And we are also benefitting from Aviva’s diversity, with 42% of our earnings coming from outside of the UK“.

That still sounds like a buy to me.

Undervalued bargain?

I’ve owned shares in RSA Insurance Group (LSE: RSA) in the past, back when they seemed seriously undervalued and were paying irresistible dividends. That particular undervaluation was outed and I sold at a profit, but today I still see the firm as a good-value long-term investment — even after a 45% gain since a low point in February this year.

The forecast P/E multiple of nearly 18 based on this year’s forecasts would usually be seen as stretching, but an EPS growth of nearly 40% on the cards for next year would drop that to under 13, and dividends are expected to come storming back to yield 3.8%.

The share price saw a brief Brexit blip, but since a low in February we’ve seen a 45% climb to 535p, so it looks like the institutional investors are seeing RSA as a solidly recovering insurance investment. I agree.

How much cash?

On the dividend front, it’s hard to ignore the oodles of cash that Direct Line Insurance Group (LSE: DLG) has been handing over to shareholders in recent years.

The motor insurance firm paid 13.8p per share as an ordinary dividends in the year to December 2015. But special dividends, including the proceeds from the sale of the firm’s International division, took that up to a handsome a cash handback of 50.1p p share.

The total dividend forecast for this year of 32p would provide a yield of 9% on today’s 355p share price, and we’re looking at a company offering cash-generative insurance services in the UK and which should be immune to Brexit, Trump, and any other international bogeymen that are sent to scare us.

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Alan Oscroft owns shares of Aviva. 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.