Insurers Aviva (LSE: AV), RSA Insurance (LSE: RSA) and Prudential (LSE: PRU) have all published first-quarter results, with a mixed response from the market.
Prudential’s shares closed down 1% after its update yesterday. Aviva and RSA released results this morning, and their shares are trading up 0.3% and 2.3%, respectively, at the time of writing.
The three companies are very different businesses:
- RSA is general insurance — commercial and personal (motor, home, travel etc)
- Prudential is life assurance (and fund management)
- Aviva is general insurance and life assurance (and fund management)
Marked differences
The current state of the three companies’ businesses is also markedly different.
Prudential is in rude health, and has been for a long time. Mike Wells, currently head of the group’s US subsidiary, is about to take over the baton of group chief executive from departing boss Tidjane Thiam.
Aviva has been undergoing a protracted restructuring since the financial crisis, but has been on the road to recovery since Mark Wilson came in as chief executive at the start of 2013. Aviva has just acquired Friends Life in a £5.6bn mega-deal.
RSA went into crisis in late 2013 after discovering serious claims and accounting irregularities in its Irish business, as well as issuing a series of group-wide profit warnings. Stephen Hester, who led the first phase of Royal Bank of Scotland‘s post-financial-crisis recovery, was appointed chief executive of RSA in February 2014. He’s been selling off assets, and the company remains in the early stages of a turnaround.
Different geographies, different earnings
One further key difference between Aviva, RSA and Prudential is their geographical profiles.
At the last reckoning, half of Aviva’s profits came from the UK & Ireland. Europe (mainly eurozone) contributed 40%, Canada 9% and Asia 1%. The Friends Life acquisition will further increase the UK proportion.
RSA has just completed a pull-out of Asia and is trying to offload its Latin American business. That would leave the company with a focus on UK/Ireland, Scandinavia and Canada.
Prudential’s profits come from the USA (37%), the UK (33%) and Asia (30%).
Prudential’s strategy of pursuing value over volume in the mature US and UK markets and growth in Asia is proving highly successful. The company has averaged annual mid-teens earnings growth over the past five years, which analysts expect to continue. Prudential trades on a current-year forecast price-to-earnings (P/E) ratio of 14.5, falling to 12.9 next year, giving a price to earnings growth (PEG) ratio of 1.
RSA’s earnings performance has been atrocious in recent years, but analysts see stabilisation this year, followed by a modest earnings rise of 6% next year. RSA’s forecast P/E for the year is the same 12.9 as Prudential’s, but RSA’s lower earnings growth gives a much less attractive PEG of 2.1.
A muted earnings performance is expected from Aviva in the current year, but 16% growth is expected to kick in next year. And with a P/E of 9.7, the PEG is 0.6.
The “value” choice and the long-term view
Aviva’s P/E and PEG ratios make it the clear “value” choice; indeed, the ratios are at bargain-basement levels. Aviva’s forecast dividend yield — 4% this year, rising to 4.9% next year — also suggests better value than RSA (3.2%, rising to 3.6%) and Prudential (2.5%, rising to 2.8%).
The diversification of Aviva’s composite business model is attractive. The large exposure to the UK is perhaps less attractive, but the company does have the advantage of being the UK’s only composite insurer of scale. There is execution risk with the integration of Friends Life, but with the chief executive having done such a good job so far, this may be a risk well worth taking for investors.
While I think we could see a strong performance from Aviva’s shares over the next couple of year’s, I think Prudential may be more attractive on a very long-term view. This is because of Prudential’s geographical diversification; in particular, the substantial exposure to Asia, where the investment and protection needs of a growing and increasingly prosperous middle class should be a turbo driver for Prudential’s long-term growth.
