Value In The Insurance Sector

Sometimes whole sectors appear to be cheap, and I think this may well be the case with British insurance companies at the moment. If you are looking for high yields and single digit price-to-earnings ratios then there are a whole range to choose from- a good indicator that the sector as a whole is undervalued.

I will be taking a look at three big UK insurers that might be undervalued- Aviva, RSA and Catlin. This is intended to be a starting point for your own research, but I really recommend giving these companies a good look.

Aviva is a big chunk of my own investment portfolio, as I decided to invest a couple of years ago around the £3 per share mark. Despite a strong rally to around £4.50 I thought value remained and I decided to hold on, buying a few more when they reached £2.80 in the midst of the last stock market lull. The shares currently trade at 363 pence per share.

The estimates for 2012:

Dividend Yield (2012) 7.4%

Forward P/E Ratio (Based on 2012 figures) 6.4

Net Tangible Asset Value Per Share (Including allowances made for preference shares) £2.33

Aviva is trading on a low earnings multiple, has a big dividend and decent asset backing, but I think it’s branding in the UK is also becoming increasingly strong. The shares have been adversely affected by events in Europe, and I am not going to jump in at today’s prices but will happily buy into any dips.

I don’t hold shares in RSA, but have read plenty of articles on the company and its mouth watering dividend. In fact I probably would buy into it, but I am happy with my investment in Aviva. The shares currently trade at 112 pence.

Dividend Yield (2012) 8.8%

Forward P/E Ratio (2012) 7.8

Net Tangible Asset Value Per Share: 78.05p

Catlin is a specialist insurer in global property/casualty insurance and as a result of this it was hit hard by flooding in Asia as wall as the Japanese Tsunami. However although last years profits were hit hard, insurers can benefit after big disasters, as their premiums tend to rise pretty considerably. The shares trade at 419 pence.

Dividend Yield (2012) 6.2%

Forward P/E Ratio (2012) 7.7

Net Tangible Asset Value Per Share: 748 cents = 489 pence when £1= $1.53

I don’t have shares in Catlin either but I think the company has good potential- yes it is exposed to natural disasters, which can wipe out a years worth of profitability, but the dividend was maintained last year.

I really think the insurance sector is under loved at the moment, but do your own research- these are just a suggested starting point and watch out for exposure to sovereign debt- what looks like a strong balance sheet based on 2010 figures may look weaker after a Greek debt haircut or two.

Of course these are all big companies- have a look for other alternatives, on of my investments is a company called Randall and Quilter (RQIH) which has stayed steady so far, but has a rock solid balance sheet.

Good Luck!

This has got to be one of the most talked about IPO’s of all time- the social network giant, Facebook, is going to offers its shares on the stock market. It is expected to offer up $5 billion worth of stock to investors, with most analysts reckoning on a market cap of around $100 billion.

Why I wont be buying

I don’t doubt that this is momentous news, but I really have no stomach for this investment at this price- sure it is an exciting company with plenty of potential, but the figures, in my mind, do not suggest great returns for those buying in at the initial public offering.

Last year the company made $1 billion dollars of profit on sales of $3.7 billion dollars, so that puts the company on a trailing price to earnings ratio of around 100- very very steep considering the average for the FTSE 100 isn’t much over 10.

However I still think the IPO will go pretty well- this flotation will attract a serious amount of news coverage and so demand is probably likely to be pretty high. I know I am avoiding the company on valuation reasons, and that its proponents will argue the valuation is justified on future earnings prospects, but is this the case?

First off Facebook is huge, with over 600 million active users- great, but in terms of size perhaps there isn’t a whole lot more the company can do to attract new users. However this isn’t the source of future earnings potential- Facebook has the possibility of massively increasing its advertising revenue- lets face it making $10 per year per active user wouldn’t be too difficult, it really doesn’t take that many advertising clicks.

However there is a complex risk reward relationship going on here- if Facebook’s advertising becomes more obvious and people click more, will the Social Network be abandoned- we all know about the fate of MySpace, bought by Murdoch’s News Corporation for $580 million and sold for only $35 million a few years later. And there is plenty of competition- Twitter springs to mind first.

I do believe that Facebook has massive potential, and I think I will probably remain the dominant force in social networking, and that it will expand horizontally into higher revenue streams. However trading at 100 times earnings there is too much risk for me, and I shall be sticking to my boring companies with steady prospects, solid balance sheets and low valuation ratios. Sorry Mark.