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How low can the Aviva share price go?

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Does the falling share price of Aviva (LSE: AV) indicate deeper problems that are not yet public?

Despite rising profits, double-digit dividend growth and a strengthened balance sheet, shares in the FTSE 100 insurer have fallen by 5% over the last year, lagging the wider market. As a shareholder myself, I’m not sure why the market is so cautious about this successful turnaround.

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Although half-year profits were hit by severe winter weather in the UK and Canada, overall performance was still pretty solid in my view. Operating profit excluding disposals rose by 4% to £1,421m, and this figure was supported by cash generation of £1,493m.

The group used some of its spare cash to repay £500m of high-cost debt and return £600m to shareholders through a share buyback. Alongside this, the interim dividend rose by 10%.

Aviva’s regulatory ratios also remain comfortable. And its performance over the last few years suggests to me that CEO Mark Wilson’s turnaround plans have been successful. So what is wrong?

No loyalty

We all know why we need insurance. But the reality is that we don’t really like paying for something we rarely use. We tend to shop around for the cheapest insurance that offers the cover we need, and we don’t hesitate to switch insurers when we renew.

Insurance bosses like Mr Wilson aren’t happy about being seen as a necessary evil. They want to customers to stay loyal and purchase multiple services from them. The prize at stake is higher profit margins and an expanded share of mature markets such as the UK.

Achieving this change may not be easy. Efforts so far include a web portal where you can manage all Aviva services, an app to help make you a safer driver, and leak detection kits for home insurance customers.

Will this work? It’s too soon to say. But I suspect it could. In the meantime, I believe that Aviva shares are probably getting close to the bottom of their trading range. Broker forecasts put the stock on a price/earnings ratio of 8.6 with a 6.1% yield for 2018. I maintain my dividend buy rating on this stock.

Just show me the cash

My second pick today is also an insurance firm. But it’s very different. Chesnara (LSE: CSN) buys up closed books of life insurance policies from other insurers and runs them through to maturity.

What this means is that the group doesn’t have to worry about customer acquisition, marketing or developing new services. The key to its success is skilled management of its policies and low costs.

Chesnara has been very successful. Its share price has tripled over the last 10 years, while dividends have risen every year since the group’s flotation in 2004. This gives me a good level of confidence in the company’s management and strategy.

Today’s half-year results suggest to me that this progress is likely to continue. Although the group’s economic value — a valuation measure used by insurers — fell by 3% to £700.8m, this was mostly due to currency headwinds. Cash generation remained strong at £48.6m, providing support for a 3% increase to the interim dividend.

Looking ahead, analysts expect Chesnara to pay a full-year dividend of 20.7p per share, giving the stock a 5.3% yield. In my view these shares are worth considering for a long-term income.

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Roland Head owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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