Aviva Facing Tough Decisions As Investors Bail Out

Investors clearly don’t like what’s going on with Aviva (OTCPK:AVVIY, AV.L), as these shares have been pounded down 25% over the past year, with most of that damage coming in the last six months. The similarly weak results from Prudential plc (PUK) and Legal & General Group (OTCPK:LGGNY), particularly when compared to Allianz (OTCPK:AZSEY), Ageas (OTCPK:AGESY), and other non-UK insurers, would certainly argue for a strong Brexit uncertainty/risk component, but I believe Aviva shares are also suffering from a lack of confidence tied to the recent departure of the CEO and uncertainty over the future direction of the business.

Whoever takes the top job at Aviva, he or she will have some difficult decisions to make. The company’s leverage is higher than that of its peers (and higher than it may appear on casual observation), and its hodgepodge of businesses outside of the U.K., France, Canada, and (maybe) Poland don’t necessarily make sense for the long term. While I understand that Aviva may well be untouchable until the Brexit situation is resolved and there’s a new CEO in place, today’s valuation assumes a very weak run of financial results that I think are unlikely to materialize.

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Aviva Facing Tough Decisions As Investors Bail Out

Aviva Redeploying Capital, But The Stock Still Trades At A Discount

Aviva PLC (OTCPK:AVVIY) (AV.L) shares haven't gotten much love from the market since my last update on this top-10 global life insurance company. It hasn't been a great stretch for the group as a whole (Prudential PLC (PUK) and Legal & General (OTCPK:LGGNY) have slightly outperformed Aviva, but still underperformed the U.S. S&P 500, while Standard Life (OTCPK:SLFPY) has been even weaker), but investors remain concerned about the company's exposure to the slow-growth, capital-intensive British annuity business, as well as its overall ability to generate attractive growth and return capital to shareholders.

Some of that skepticism makes sense… to a point. The company's decision to grow its UK bulk annuity business is a curious one, and Aviva is a weakling in Asia compared to Prudential PLC, but it takes less than 5% long-term earnings growth to support a fair value about 10% above today's and a long-term annualized return in the high single digits. Given the company's improved back-book management, its growth potential in markets like Poland and Turkey, and its clean capital position, the discount to fair value seems a little, well, unfair.

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Aviva Redeploying Capital, But The Stock Still Trades At A Discount

Prudential PLC Marrying Strong Growth With Disciplined Capital Return

All things considered, I think the changes in the insurance markets are starting to favor P&C insurers again over life insurers, but that doesn't mean that there still aren't opportunities in the life space. Names like ageas (OTCPK:AGESY) and AXA (OTCQX:AXAHY) have done pretty well, and there is ongoing opportunity in names like Aviva (OTCPK:AVVIY). I'm also adding Prudential PLC (PUK) to this list, as I believe this company's high-growth Asian operations, better-than-assumed U.S. operation, and improvable U.K. operations all contribute to a value that is about 10% above today's price. I'd also note that Prudential PLC has prioritized returning capital to shareholders, with a 5% annual growth target and over 10% actual growth over the past decade-plus.

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Prudential PLC Marrying Strong Growth With Disciplined Capital Return

Seeking Alpha: AXA Needs To Unlock Growth To Achieve A Higher Share Price

French insurance giant AXA (OTCQX:AXAHY) has been doing what it said it would, but investors have been slow to reward the company for its progress. The shares are down about 3% from my last update, which is better than the performance of peers like Generali (OTC:ARZGF), Aviva (NYSE:AV), and Zurich (OTCQX:ZURVY), and a little worse than Allianz (OTCQX:AZSEY), but investors shouldn't shoot for "no worse than the others" with their investments.

Management has done a good job of reducing expenses and boosting cash flow, and the company's relatively solid Solvency II score is encouraging for further capital distributions to shareholders. On the other hand, high-growth markets like Turkey haven't delivered the hoped-for growth, P&C premium growth has proven challenging, and inflows to both the life and asset management businesses aren't as strong as they need to be.

A key consideration, then, is whether AXA can take the steps necessary to accelerate bottom line growth from the 2% to 3% rate seen in 2015. Today's price is fair if the 10-year adjusted earnings growth averages around 3%. A growth rate of 4% bumps the fair value to $26.50 and a little over 5% a year in adjusted earnings growth supports a target close to $29.50. I believe 5% is attainable, but far from certain, so this isn't a money-for-nothing sort of investment prospect.

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AXA Needs To Unlock Growth To Achieve A Higher Share Price

Seeking Alpha: With Demonstrated Execution, Will Aviva Finally Get Some Love?

I can't say my bullish call on British insurance company Aviva plc (NYSE:AV) has been a good one, as the shares are down about 15% from my June 2015 article and only about half of that decline can be attributed to currency. While premium growth in the non-life business has been a little pokey, the life business has grown pretty nicely and the company surprised everybody with a stronger capital position vis-a-vis Solvency II.

Looking ahead, management still has to prove that Aviva can wring operational synergies from the Friends acquisition and take advantage of what management believes will be a growth market in UK savers and a significant cross-selling opportunity. At the same time, delivering on the growth potential of markets like Poland and Turkey is important. I continue to believe that Aviva is a significantly underrated company, and with worries about its capital position likely to diminish, a fair value of nearly $18 makes this a stock to consider.

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With Demonstrated Execution, Will Aviva Finally Get Some Love?

Seeking Alpha: Aviva PLC Getting Better, But Maybe Not This Fast

Aviva PLC (AV) is up about 85% since management first laid out a comprehensive restructuring plan in July of 2012. While that sounds like an impressive return, it's not quite as remarkable when compared to the 70%-plus gains for Prudential PLC (PUK) and Legal & General (OTCPK:LGGNY), and the 50%-plus gains for Allianz (OTCQX:AZSEY) and AXA (OTCQX:AXAHY). Aviva management has done a good job of turning over its senior management and progressing with cost-cutting, shedding non-core businesses, and reducing leverage. Evaluating Aviva's fair value is a little more challenging, but even with the challenges presented by a change in the key U.K. annuities market, Aviva looks about 10% undervalued today.

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Aviva PLC Getting Better, But Maybe Not This Fast