The market loves a good turnaround story, and Aviva (LSE: AV) (NYSE: AV.US) chief executive Mark Wilson has delivered in spades since he took the helm on 1 January 2013.
Aviva’s share price is up by 62% from the March low that followed Mr Wilson’s big dividend cut, and things got even better yesterday, when the insurer announced a 4.5% increase to the interim dividend.
Shareholders in UK peer RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US), on the other hand, are still suffering.
The only dividend action RSA shareholders have seen since ex-Royal Bank of Scotland boss Stephen Hester took over, has been the cancellation of their firm’s dividend, ahead of a £775m rights issue, earlier this year.
Both companies published their half-year results yesterday, giving us a snapshot of progress so far this year.
Aviva vs. RSA
To gauge how each company is performing, I’ve chosen three key insurance industry metrics:
| Aviva | RSA | |
|---|---|---|
| Return on equity | 14.5% | ca. 0% |
| Price/Book ratio | 1.7 | 1.2 |
| Combined operating ratio | 95.5% | 100.8% |
The results are largely as you’d expect, given that RSA’s recovery is only just starting.
RSA’s combined operating ratio of 100.8% shows that it made an underwriting loss during the first half — claim payouts and operating expenses were greater than total premium income. However, RSA is targeting £180m of cost reductions, which if delivered, could considerably improve this ratio.
Aviva has already done much of its cost-cutting, and reported an 8.4% fall in operating expenses, compared to the same period last year. This helped the firm to generate a return on equity of 14.5%, a level being targeted by RSA.
Equal valuation?
Analysts are currently pencilling in adjusted earnings — excluding exceptional costs — of 40.5p per share for RSA this year. In my view, that seems ambitious, but assuming these estimates aren’t downgraded following yesterday’s results, it leaves RSA on a remarkably similar valuation to Aviva:
| Aviva | RSA | |
|---|---|---|
| 2014 forecast P/E | 10.8 | 10.7 |
| 2014 forecast yield | 3.3% | 2.7% |
In terms of price, RSA shares don’t offer the kind of discount I’d expect to see, compared to Aviva. This might be justified if RSA was expected to report a big increase in profits in 2015, but it isn’t — analysts currently expect RSA’s profits to fall next year, before gradually recovering.
Buy RSA or Aviva?
Investing in both companies carries some risk: Aviva’s strong performance means it could be at risk of a pullback, while I’m also concerned that RSA shares do not yet look cheap enough, especially as CEO Stephen Hester warned yesterday that “clean-up costs are proving higher than initially expected“.
