Since the financial crisis, the insurance sector has been unloved and out of favour. The whole of the financial sector suffered reputational damage after the credit crunch. Yet insurance companies are not banks: they had less of the bad debts that the banks had, nor were profits adversely affected by a post-crisis world of low interest rates.
Because of this, insurance companies have been one of the contrarian plays of recent years. Investors have had particular interest in Aviva (LSE: AV) (NYSE: AV.US) and Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US). But which of these companies is now worth buying into?
Aviva
Aviva has been perhaps been one of the most discussed companies of recent years at the Fool. It has often been highlighted as a value play, yet the share took years to come good. This left many investors, including myself, vexed by the company. Was the company cheap for a reason? Was it doomed to a slow decline? In other words, was it a value trap?
I was one of the investors who eventually sold out of the company, yet, with hindsight, I think the lesson I draw from my experiences with Aviva is the value of patience.
A company’s share price is basically the market’s prediction of the company’s future profitability. Aviva had a low rating because profits were falling. But once the market saw an end to the fall in profitability, and proof that the company was turning around, the business’s share price turned up.
In 2012 Aviva reported a loss, but in 2013 the company has seen a return to profitability, an increasing value of new business, and rapid growth in emerging markets such as Poland, Turkey and Asia. The numbers show how this recovery is progressing: the predicted 2014 P/E ratio is 10.5, with a dividend yield of 3.3%, while the 2015 P/E is 9.5, with a dividend yield of 4.3%. Earnings per share are growing again, and so is the share price.
Chief Executive Mark Wilson has described today’s Aviva as simpler, more focused and better managed. I see Aviva as a recovery story which is just gathering momentum.
Legal & General
I see Legal & General as much further along the road to recovery than Aviva. The share price has been steadily increasing since the Financial Crisis, having more than quadrupled since the depths of recession.
Legal & General is a company which has been growing, and continues to grow. The earnings per share progression bears this out:
2011: 12.22p, 2012: 13.66p, 2013: 15.20p, 2014: 16.09p, 2015: 17.55p
 This is a business that has avoided many of Aviva’s troubles, but because of this the share price has already increased a lot, and L&G is no longer the contrarian play it once was. The company has a 2014 P/E ratio of 12.8, with a dividend yield of 4.9%, and a 2015 P/E ratio of 11.7, with a dividend yield of 5.4%.
Foolish bottom line
The insurance sector has already increased in value substantially, but I think this recovery story has further to run. I would say both Aviva and Legal & General are cautious buys. Because I think it has the better turnaround prospects, given the choice I think I would buy Aviva.