The stock of RSA Insurance (LSE: RSA) hit its 52-week high in recent days, but its rally may be short-lived — would you be better off investing instead in the shares of Aviva (LSE: AV) or Prudential (LSE: PRU)?
Frankly, I am not particularly upbeat about any of these three insurers, and here’s why.
RSA: Is It Too Early For A Takeover?
A general insurer, RSA has gone through several changes in recent years, and it is not quite the finished article as yet.
Its shares, which currently trade at 511p, are up 26% in the last month of trade: it looks like the insurer could soon be taken over by Switzerland’s Zurich for up to 600p a share, which would value the business at up to £6bn, for a rich forward net earnings multiple of 20x.
RSA in back on the right track after a few difficult years, but it remains a turnaround story. Based on trading multiples and fundamentals, it’s hard to justify a valuation much higher than 400p a share, in my view. Add to that a typical takeover premium at between 20% and 30%, and a valuation higher than its current share price doesn’t seem conceivable, also considering the risk that Zurich may not put forward any formal offer.
RSA’s unaffected share price before Zurich-related takeover talk was 437p. Most analysts I talked to say that this is a done deal, and one that will be struck between 550p and 600p a share. But the Swiss insurer’s results missed expectations this week, and surely Zurich will not want to pay over the odds to secure a target that is still in the midst of a comprehensive restructuring.
There’s potential in RSA but there’s risk, too — and inherent operating risk is not reflected in its current valuation at a time when it’s uncertain how new regulations will impact capital requirements in the sector.
Furthermore, time is also needed to execute additional divestments of non-core assets, which could be around the corner and could help RSA release value ahead of a change of ownership.
Aviva Vs Prudential
The shares of Aviva — up 10% since the turn of the year — have outperformed those of Prudential by seven percentage points in 2015. The valuation gap between the two is slowly but surely closing, with Aviva stock trading at 12.3x forward earnings, which compares with Prudential’s 13.5x.
Aviva offers the highest dividend yield, but also a higher risk profile and a less diversified portfolio of assets than Prudential. The average price target from brokers, according to consensus estimates from Thomson Reuters, stands at 615p a share, which implies upside in the region of 16% from its current level.
Analysts are even more bullish on Prudential, suggesting that the valuation gap between the two could actually widen — Prudential’s average price target is 1,840p, for an implied upside of 20% from its current level.
One problem for Prudential is that its shares have not lived up to expectations since early 2015 — well, the insurance sector doesn’t seem to inspire confidence in any of the big players. Investors are reluctant to trust projections, while new capital requirements and other regulatory issues, combined with a lack of confidence in the Asian market, where Prudential generates about 30% of revenues, have all contributed to its poor performance on the stock market, and are very likely to persist.
Aviva is only marginally better off due to a more conservative geographical mix and a £5.6bn Friends Life deal that is on track to deliver synergies. This has made a big difference so far this year, but the new Solvency II regime will soon test its underlying strength. Finally, as Allianz‘s quarterly results showed today, the fund management operations of both Aviva and Prudential could be a drag on their performances, so a solution may be required sooner rather than later.