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Top 3 picks – UK Insurance

January has been a difficult time for investors with the removal of the Swiss Franc cap, Mario Draghi finally delivering the ECB QE program and the Greek elections all causing serious volatility in the markets. The oil price crash has wiped billions off the valuations of worldwide oil companies and other commodities like Iron ore and copper are also suffering. As we have mentioned before, investors often look to yield to provide regular income and for this reason, these kinds of stocks can weather the storm better than most. With yet more uncertainty ahead in the markets with Greek debt negotiations and the upcoming UK election, here are 3 stocks from the UK insurance sector we think are worth your consideration.

First up, esure Group Plc (LON:ESUR), “The Group is a UK-focused personal lines insurer founded in 2000 by Peter Wood, the foremost general insurance entrepreneur in the UK. The Group has established a strong platform for growth and a track record of profitability. In 2011, the company launched a broker service that extends its motor insurance footprint by offering the products of other carefully selected insurers using its brands.”

Currently trading on a forecast 2014 P/E of 11, it has a forecast dividend yield of over 7% and a payout ratio of around 80%. Revenues in 2014 are expected to be £506m with Pre-Tax profit of £108m and EPS at 20.70p. Small growth is expected in revenues and profits during 2015 and 2016 and they also recently bought the remaining 50% of Gocompare.com taking their ownership up to 100%. The share price looks like a decent entry with a 5 year high hitting around 334p and the 52 week range 193.5p-290p. With the current share price around 230p, this would be our top pick from the 3 mentioned.

Second is BRIT Plc (LON:BRIT), “Brit PLC is a market-leading global specialty insurer and reinsurer, focused on underwriting complex risks. We have a major presence in Lloyd’s of London, the world’s specialist insurance market provider, and a significant US and international reach.  We underwrite a broad class of commercial specialty insurance with a strong focus on property, casualty and energy business. Our capabilities are underpinned by our strong financials.  Brit is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.”

Recently listed, it currently trades on a forecast 2014 P/E of 9.5, it has a forecast dividend yield of over 8% and a payout ratio of around 80%. Revenues in 2014 are expected to be £1,286m with Pre-Tax profit of £122m and EPS at 28.06p. The share price 52 week range is 204.75p-273.2p with the current share price around 270p. Shares in issue 400.45m with today’s volume 197,621 so probably quite illiquid. Although the share price is near the top of its 52 week range, we still think it is a buy based on the fundamentals.

Lastly Admiral Group (LON:ADM), “Admiral was launched in 1993 as a division of Brockbank. In 1999, it was bought in a management buyout backed by Barclays Private Equity. The group specialises in providing low cost car insurance for young drivers, people living in cities and those driving high-performance cars.”

Consistent increase in Revenue, Pre-Tax Profit and EPS since FY2010 however expected fall in EPS for FY2014 of 3% followed by 9% in FY2015. Currently trading on a forecast 2014 P/E of 14 so more expensive than the two above. The dividend in FY2013 was 46.9p and is expected to jump to 98.51p in FY2014 giving 6.8% yield. EPS in FY2014 expected 101.33p meaning it’s almost a 100% payout ratio so this might be something to keep an eye on. Should earnings come out less than expected it may force the company to cut the dividend which would not be good news for the share price. The share price itself has a 5 year high of around 1710p with 52 week range 1195p-1575p. The current share price is 1450p. Like BRIT Plc, we would consider the stock as a buy based on fundamentals but we feel more caution is required here due to a higher P/E and high payout ratio.

Final note worth mentioning is you may prefer Phoenix Group (LON:PHNX) instead of Admiral Group. Fundamentals are P/E 11.5, yield 6.4%, Payout ratio 73% however the share price is around the 5 year high and forecasts show an expected big drop in EPS during FY2015. Worth researching though.

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