Thanks to their asset light, high-return-on-equitybusiness model, insurance companies can be some of the most cash generative businesses around.
And realising this fact early on in his career, helped billionaire Warren Buffett build the business empire he presides over today.
In particular, during the late60sBuffett paid around $9m for two small, well-run insurance companies,National Indemnity and its sister company, National Fire & Marine.
Today, after five decades of growth and business reinvestment, these two companies are worth$111bn, a value which exceeds that of any other insurer in the world.
Of course, Ive cherry-picked this example, but it illustrates how lucrative insurance investments can be.
Best of breed
Lancashire is the perfect example of a well-run insurer that looks after its investors. Strict insurance underwriting controls have allowed the company to return around 100% of income to shareholders during the past five years.
Including both dividends and capital growth Lancashires shares have returned approximately 500% since coming to market during 2006.
Lancashires shares arent expensive, either. The company currently trades at a forward P/E of 10.7. City analysts believe that Lancashires dividend yield will top 9.5% this year as the company continues to return the majority of its income to investors.
Over the years, Admiral has built a reputation for being one of the FTSE 100s dividend champions.
Although the companys dividend yield lags that of Lancashire, its still highly impressive.Over the past five years, Admiral has returned a total of 1.1bn to investors via both regular and special dividend payouts. This works out as around 90% of Admirals net income generated over the period.
City analysts have pencilled in a dividend yield of 6.1% for Admiral this year and 6.5% during 2016. The company currently trades at a forward P/E of 15.7.
Direct Line and Esure have only been public companies for a couple of years, but theyre moving rapidly to build the same dividend appeal as Admiral and Lancashire.
Direct Line is planning a special dividend of 27.5p per share to investors this year following the disposal of its international division. Including the companys regular payout, Direct Lines cash return to investors will be in the region of 44.3p per share this year, a yield of 12.9%.
Analysts expect Direct Lines dividend yield to fall back to 4.6% next year.
Esureis set to support a dividend yield of 6.0% this year and 6.3% during 2016.
According to City projections,Esuresdividend payout will be covered 1.3 and 1.2 times by earnings per share during 2015 and 2016 respectively. The company currently trades at a forward P/E of 13.4.
Lloyds of London insurer, Amlin is a great play on the wave of mergers currently sweeping the insurance industry.
Including a special dividend of 34p per share issued during April, Amlins shares have returned12.3% year to date, outperforming the FTSE 100 by 9%. Excluding special dividends, City analysts expect Amlins shares to yield 5.9% this year and 6.2% during 2016. The company currently trades at a forward P/E of 11.8.
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