The insurance sector holds huge appeal for long term investors. That’s because it offers a combination of low valuations, high yields and encouraging growth prospects which, in 2016, could allow a number of its constituents to light up the FTSE 100.
For example, Aviva (LSE: AV) is forecast to post a rise in its bottom line of 11% in 2016. This has the potential to positively catalyse investor sentiment in the stock and with Aviva being in the middle of integrating the recently acquired Friends Life business, its longer-term outlook is also very encouraging.
That’s because Aviva recently reported that its planned synergies were being met and that the integration process was progressing in line with expectations. With the new, enlarged Aviva set to dominate the life insurance market, it appears to be well-positioned to continue to grow its net profit at a rapid rate.
In addition, Aviva offers a yield of 4.8% and with dividends being covered more than twice by profit, rapid dividend rises are very much on the cards. While 2016 may be the year when the Bank of England finally raises interest rates, high-yield stocks such as Aviva are still likely to remain in vogue over the medium term due to a likely pedestrian rise in interest rates.
Admiral on crest of a wave
Similarly, motor insurer Admiral (LSE: ADM) is likely to repeat its FTSE 100-beating performance of 2015 next year. That’s because it still offers a yield of 5.6% despite posting a share price rise of 27% since the turn of the year. This indicates that it has huge appeal for income-seeking investors and as a result, its shares could be bid up further.
Certainly, there are concerns surrounding the outlook for the car insurance market and with Admiral due to report a fall in net profit of 1% next year, its near-term outlook is perhaps rather disappointing. However, the company has prioritised margin protection over market share in recent years as insurance premiums have come under pressure. So it appears to be in a strong position through which to grow its top and bottom lines as premium pricing begins to slowly increase.
Income pick
Meanwhile, Direct Line (LSE: DLG) is also due to post a fall in profit next year. Its bottom line is set to decline by 9% which, while disappointing, already seems to have been priced-in by the market.
Evidence of this can be seen in the company’s valuation, with Direct Line trading on a forward price-to-earnings (P/E) ratio of 14.8. As such, its valuation could increase next year as investors look ahead to the delivery of Direct Line’s strategy that focuses on differentiating its brands and on improving the customer experience.
With Direct Line offering a yield of 4.9%, it continues to have excellent income appeal. And with dividends due to be covered 1.4 times by profit in 2016, they appear to be well-covered and highly sustainable.