TIme to Love Non-Life Insurance

One of the key investment themes that I continue to champion is that of the "Hunt for Yield". Here we are, in a period where global central banks are conspiring to keep short- and long-term interest rates as low as possible in order to shore up what is fragile economic growth in the "New Normal" of a post-crisis Developed World. 

At a time when government bonds, and even investment-grade corporate bonds, are no longer offering anything like attractive yields to maturity, where can income investors turn? One solution is to subscribe to Neil Woodford's new fund, which unsurprisingly is stuffed yet again with AstraZeneca (LON:AZN), GlaxoSmithKline (LON:GSK) and tobacco companies like Reynolds American, as it was back in his old funds at his former employer Invesco Perpetual. 

I prefer a stock-picking approach, focusing on sustainable value and momentum. Within the UK stock market, the sector that looks best placed on these metrics is the UK non-life insurance sector, containing such high yield gems as Brit (LON:BRIT), Amlin (LON:AML) and $CGL within the Lloyds of London reinsurance segment, and the RBS spin-off Direct Line Insurance (LON:DLG) in more classic Property & Casualty insurance. 

High and Sustainable/Growing Yields

Each of these four insurers offer prospective dividend yields in excess of 5%, up to 10% in the case of recently refloated Brit (LON:BRIT). 

Dividend payout ratios are of the order of 60% except in the case of Brit (LON:BRIT), and Returns on Equity are typically between 10% and 13% this year and next. All of which suggests that not only are these high dividend yields sustainable (except in the case of a sharp unexpected drop in earnings), but that long-term dividend growth should be in the region of 4-6% going forwards. Perhaps not exceptional, but certainly more than enough to compensate for inflation.  

Value aplenty too

On a basic metric like trailing price/book, you are paying somewhere between 1.1x (Catlin (LON:CGL), £BRIT) to 1.5x (£DLG), so hardly extortionate for solid double-digit ROEs. Forward price/earnings ratios range from 10-12x, so also well below the…

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