Aviva shares could be worth clinging onto!
Looking at the grand scheme of things, the stop-start performance of Aviva (LSE: AV) shares during the last 18 months will have probably left most investors feeling cheated. However, there have been some improvements in the underlying business of late that are worth taking stock of.
First and foremost, the “rights issue in disguise” acquisition of Friends Life has had a notably positive effect upon the group’s regulatory capital position, which is positive in light of the looming implementation date of the EU’s more stringent Solvency II capital regime in January 2016.
In addition, the addition of Friends Life net assets dilutes the leverage of Aviva’s balance sheet, offers up to £225 million in annual cost savings and also boosts the cash-generative potential of the group. In short, with integration risks set aside, the acquisition is supportive of management’s strategic objectives of increasing cash flow and growth.
Secondly, Aviva will eventually benefit from a gradual increase in investment income as interest rates rise and this feeds through to the yields of longer dated US & UK fixed income instruments.
While non-life insurance shares have already begun to benefit from changes in interest rate expectations, it is possible that we could soon see a spillover into the life and pensions side of the market as forward valuations rise elsewhere.
However, having said this, further weakness in the shares cannot be completely ruled out as a possibility in the near term, given that concerns remain over whether or not management can successfully integrate Friends Life into the existing group.
I am minded to think the management team can, and that the naysayers will eventually be proven wrong. It is also possible that the lion’s share of this concern over integration is already priced into the shares, given that the current 9.6x forward price to earnings valuation provides a 20% discount to the sector average of 11.8x.
So, to sum up on Aviva, it seems that for those who have the requisite time-frame of 2-3 years available, the shares could be worth holding onto. Particularly when we consider that the long-term investment case remains strong, while the shares trade at a discount to their peer group in the present day.
Only time will tell…
RSA Shares Could Also Be Worth Keeping For A Rainy Day…
The market was quick to dump RSA (LSE: RSA) shares this week after Zurich dropped its proposed bid for the group. While a persistent lack of returns from the shares means that some investors probably shouldn’t be blamed for this, I cannot help but think that they are still worth holding on to.
As a general insurer, with a short-term investment exposure, RSA is one of those that could see higher interest rates provide a meaningful boost to its bottom line sooner rather than later.
Also, while progress may have been slow to date, management have taken lots of positive action to rejuvenate the business.
This has resulted in the group’s combined ratio reducing steadily, something which should continue as losses within the Irish division dissipate further, while balance sheet leverage has also improved markedly.
Total debt/equity now sits at 0.32x and gearing at 24.5% for RSA, while the £1.2 billion in debt that the group does hold exists purely to act as regulatory capital.
In addition, RSA’s regulatory capital coverage ratio sits at 1.3x which means that unless regulators decide to dispute the methodology employed by the group to calculate this, it should be able to meet the requirements of the EU’s new Solvency II capital regime in January 2016.
In terms of valuations, the shares currently trade on a forward earnings multiple of 12.9x, which is a significant discount to the 17.8x sector average. This is while on a Price/Tangible Net Asset Value basis, RSA’s 1.4x multiple also compares very favourably against a 2.5x sector average.
With all things considered, it seems that the future for RSA Insurance may not be quite so bleak after all, particularly after looking at the valuation metrics.
