Aviva (LSE: AV), RSA Insurance (LSE: RSA), Legal & General (LSE: LGEN) and Admiral (LSE: ADM): which one is the best play in the current market environment?
One Swallow Does Not A Summer Make
L&G shares closed in positive territory on Wednesday. Upbeat results provided a helping hand to L&G on a day when trading was particularly tough, with the FTSE 100 index down by 1% for most of the trading session. L&G stock is up, while benchmark index is down on Thursday, too. Aviva shares were up by more than 3.6% on Thursday following decent results for the first half of 2014; they were outperforming the market by almost four percentage points in early trading.
This doesn’t mean the broader insurance sector is safe.
L&G Is Pricey
As the life insurance and pensions group continues to deliver, its shareholders enjoy plenty of upside – but there are warning signs, even though L&G is a more profitable entity today than in the past few years. First, L&G shares look really expensive. Second, the growth rate for profits and cash generation isn’t incredibly appealing. Third, some analysts have suggested that tougher capital requirement may pose a problem in the next 12 months — which may not be the case, but the risk remains.
L&G has benefited from recent reforms in the pension market, with premiums receiving a boost from clients willing to outsource their pension schemes. At this level, though, the risks of holding its shares outweigh the benefits, in my view.
Aviva: The Best Of The Lot?
On 23 June, I argued that Aviva was cutting costs and was doing all it could to become a truly appealing value proposition. “Cash flow is on its way up, estimates for EPS are bullish, and management have shown they can grow the business while receiving the backing of the investor community,” I said. This life and general insurance company remains a risky investment proposition and it doesn’t look like its latest set of numbers are particularly attractive, but I think its shares are not too expensive right now, particularly if management deliver.
I would hold Aviva shares as part of a diversified portfolio and I may cash in a 10% pre-tax paper gain by the end of the year, if things went according to plans!
Too Early To Bet On RSA
RSA is still a troubled business, as its interim results show on Thursday. This is a restructuring story that may gather momentum if RSA proves it can improve its profitability over the next few quarters. It needs to cut costs, and quickly: its margins are still under pressure, while earnings growth is an uphill struggle.
One element I like is the management team, because I believe the former Royal Bank of Scotland boss, Stephen Hester, is the right man for the job if he is given enough time.
Admiral Is No Bargain
Admiral shares are down 8% since 9 July, when the motor insurance company warned investors of lower sales in the first half of 2014 and little growth ahead. Back then, it also announced a bond offering, which testifies to the need of different funding sources for insurers right now.
As with L&G, Admiral shares aren’t cheap, and there are better alternatives around, although the operating profitability of Admiral as well as its business model and elements to like – and I would like them even more if the shares were 20% cheaper.
