Four European Insurance Stocks With Reliable Yields

Insurance
Stocks
With
Reliable
Dividends

Using
these
criteria,
Heathfield
identifies
four
European
insurance
stocks
with
reliable
dividends:

•
Admiral
(ADM)
•
Allianz
(ALV)
•
Munich
Re
(MUV2)
•
Zurich
Insurance
(ZURN)

“Our
shortlist
focuses
on
firms
that
have
a
track
record
of
minimal
dividend
reductions
and
omissions,
and
have
balance
sheets
that
can
withstand
solvency
stress
tests
that
still
leave
them
in
a
position
to
pay
forecast
dividends,”
Heathfield
explains.
“These
firms
provide
investors
with
reliable
mid-single-digit
and
real
yields.”

While
dividends
may
not
be
perceived
to
have
the
same
importance
as
capital
gains,
“we
think
they
are
important
and
drive
the
share
price
performance
of
at
least
one
half
of
our
coverage,”
says
Heathfield.

Before
the
2007-09
financial
crisis,
European
insurers
paid
out
less
than
30%
of
their
earnings
in
dividends,
he
says.
But
in
the
years
since,
payouts
have
risen
by
more
than
half,
even
exceeding
65%.
While
yields
have
increased
since
the
pandemic,
high
inflation
took
a
bite
out
of
those
returns.
“Only
with
inflation
falling
into
late
last
year
have
European
insurers
again
started
to
offer
yields
that
are
real,”
Heathfield
says.

When
looking
at
dividends,
“there
is
a
tendency
to
search
solely
for
yield,”
Heathfield
says.
But
“high
yield
says
nothing
of
staying
power.”
 Investors
should
consider
persistence
as
much
as
the
level
of
yield,
because
while
yield
should
provide
strong
income,
without
persistency,
that
may
only
be
the
case
for
a
year.
Plus,
many
stocks
with
the
highest
yields
have
weak
balance
sheets.

Additionally,
if
a
company
has
omitted
its
dividends
10%
of
the
time
or
more,
Heathfield
thinks
the
stock
should
be
excluded
from
consideration
because
that
shows
“poor
capital
management”
over
its
history.
As
one
example,
he
points
to
Aegon,
which
has
omitted
its
dividend
eight
times
over
the
last
20
years.
A
substantial
income
cut
would
be
acceptable
once,
since
the
cut
could
fit
in
the
average
cycle
of
a
cyclical
sector.

But
a
second
“would
or
could
lead
to
impaired
ability
to
match
expenses
or
an
awkward
reduction
in
disbursements
to
underlying
investors,”
Heathfield
explains.
“Whether
an
individual
is
investing
in
a
stock
for
income,
or
whether
a
fund
is
investing
for
yield,
we
think
stability
of
cash
flows
is
important,
because
an
individual
investor
is
likely
to
use
it
for
expenses
and
a
fund
is
likely
to
distribute
this
yield.”

Focusing
on
Stocks
with
Annual
Dividends

Prioritising
the
companies
that
pay
dividends
annually
versus
on
the
interim
is
another
strategy
Heathfield
recommends.
He
sees
annual
dividends
as
more
secure
than
interims.
The
first
six
months
of
the
year
are
more
stable
for
insurance
than
the
second
half
because
of
the
significant
claims
that
tend
to
surface
in
that
time.

“While
this
particularly
pertains
to
reinsurers,
it
can
catch
primary
insurers
out
as
well
if
they
haven’t
promptly
caught
an
ongoing
trend,”
Heathfield
says.
“Where
there
is
an
interim
dividend,
this
can
be
particularly
problematic
because
that
distribution
is
based
on
the
earnings
generated
over
the
first
six
months
of
the
year.
If
that
distribution
has
been
too
high
and
trading
conditions
turn,
this
can
leave
the
business
in
an
unenviable
position
for
the
final
at
the
end
of
the
year.”

When
a
company
records
its
dividends
on
an
interim
basis,
Heathfield
believes
the
final
dividend
is
the
more
important
one,
because
there’s
a
more
formal
process
to
determine
that
dividend,
one
that
considers
the
annual
report
and
accounts.

Screening
for
Insurance
Company
Dividend
Payers

Tying
it
all
together,
Heathfield
looked 
“for
the
most
obstinate
payers
based
on
history
and
combined
with
those
the
most
obstinate
capacity
to
maintain
their
yield.”

Among
other
criteria,
he
screened
out
companies
that
have
made
dividend
cuts
of
10%
of
more
than
once
in
10
years.
That
meant
the
list
excluded
Aviva,
which
cut
its
dividend
by
more
than
10%
three
times
in
a
10-year
time
frame.
Heathfield
then
gave
greater
weight
to
companies
that
pay
annual
dividends
over
those
that
pay
them
at
interims.
The
list
was
narrowed
further
by
focusing
on
stocks
Heathfield
feels
offer
dividends
at
reasonable
and
maintainable
levels,
and
for
companies
whose
balance
sheets
are
strong
enough
to
sustain
their
payouts.

Top
Insurance
Sector
Stock
Picks
and
Analyst
Commentary:

Admiral

•

Fair
Value
Estimate:
£30.70
•

Morningstar
Rating:
4
stars
•

Economic
Moat:
Narrow

“We
recommend
Admiral
as
a
company
that
has
achieved
double-digit
earnings
growth,
maintains
a
competitive
advantage,
and
delivers
investors
with
a
solid
mid-single-digit
yield.
The
business
has
a
track
record
of
better
underwriting
and
better
market-timing
than
peers.
Admiral
is
also
delivering
improvements
in
the
quality
of
its
home
insurance
and
international
car
businesses.”

Allianz

•

Fair
Value
Estimate:
€310.00
•

Morningstar
Rating:
4
stars
•

Economic
Moat:
None

“We
also
recommend
Allianz,
a
company
that
reduced
its
dividend
only
once
in
a
quarter
of
a
century
and
offers
a
buoyant
yield.
The
company
is
a
steady
grower,
particularly
in
life
and
health,
and
has
a
complementary
best-in-class
asset
management
business.
Allianz
delivers
consistent
results,
and
the
firm
has
led
the
way
in
technology
investments
in
the
universe
of
large
multilines”

Zurich
Insurance

•

Fair
Value
Estimate:
CHF
495.00
•

Morningstar
Rating:
3
stars
•

Economic
Moat:
Narrow

“Our
almost-final
recommendation
is
Zurich
because
it
provides
investors
with
access
to
a
business
with
a
first-rate
management
team.
Its
commercial
insurance
unit
is
one
of
the
largest
in
the
world
and
is
now
growing
into
more
profitable
midmarket
risks.
Farmers
is
highly
competitively
advantaged
unit,
and
while
Zurich
may
be
the
slowest
grower,
it
is
probably
the
best
quality
and
offers
a
solid
mid-single-digit
yield.”

Munich
Re

• Fair
Value
Estimate: €358.50
•


Morningstar
Rating:

2
stars
•

Economic
Moat:

None

“As
a
dividend
stock
for
the
radar,
we
recommend
Munich.
We
think
Munich
is
one
of
the
most,
if
not
the
most,
obstinate
payers,
and
it
operates
with
ironclad
solvency.
Like
Zurich,
Munich
is
a
slower
grower
and
operates
with
a
first-rate
management
team.
It
has
been
a
pioneer
of
inspection-based
insurance
services.
With
three
times
the
required
capital,
we
think
there
is
room
for
a
dividend
increase.
The
payout
ratio
has
been
trending
down
and
is
one
of
the
lowest
in
our
European
insurance
list.”

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