Prudential (LSE: PRU),Admiral (LSE: ADM) andAviva (LSE: AV) all have attractive qualities as long-term investments, but volatile equity markets can be troublesome for these companies.
You see,insurance companies allocate a percentage of their invested assets to common stocks, which may boost long-term returns, but are also a source of capital volatility. Recent equity market declines and continuing instability raises questions regarding insurers capital strength, given their exposures to equity investments.
A lesson learned
Avivas management knows all too well how damaging market volatility can be to profitability and a companys reputation. Back in2011, the Eurozone crisis wiped out a third of Avivas capital cushion almost overnight and ever since, the company has been trying to improve itsreputation. Falling bond values and equity prices wiped 700m and 400m, respectively, from the groups 4bn capital buffer in the space of just 12months back in 2011. But could this happen again?
Avivas current management doesnt think so. The group was transformed after buyingpeer Friends Life, and as of August lastyear, Avivas capital surplus totalled 10.8bn, covering the companys commitments by more than 170%. This figure implies that the group is well insulated from any sudden shocks.Avivas own analysts have stress-tested the companys balance sheet and believe that, even after a 20% fall in equity values, the groupseconomic capital coverage ratio will remain above 170%. So, it looks as if Aviva has learnt its lesson.
Well prepared
Admiral also seems to be well prepared to weather any storm in the equity markets.At the end of August, the groups capital surplus was around 270%, after accounting for payment of 2015s interim dividend. Admiral is able to report this advantageous capital position after issuing 200m of 10-year dated subordinated bonds in 2014. Without this extracapital, Admirals capital surplus would be around 100%.
Still, Admiral looks to be well capitalised for the time being, which is good news for the companys shareholders. With a robust capital position, City analysts expect the companys shares to support a dividend yield of 5.9% per annum for the next few years.
Yesterday Prudential became the first UK insurer to announceits capital strength under the new Solvency II rule. Its capital solvency ratio, a measure of the amount of capital it has as a proportion of the minimum required, came in at 190%. The figure was at the top end of analysts expectations of 180% to 190%, although lower than the 218%that the insurer reported for 2014. Nonetheless, for an insurance giant such as Prudential, a Solvency II ratio of just under 200% signals that the group is unlikely to run into trouble anytime soon.
Overall, it looks as if Aviva, Admiral and Prudential are all well positioned to weather the recent equity market volatility.
Whats more, with such hefty capital buffers in place, the dividends of these insurers look to be safe for the time being. Attimeof writing Avivas shares support a dividend yield of 4.1%, Prudentials shares support a yield of 2.7%, and as mentioned above, Admiral is set to yield 5.9% this year.
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Rupert Hargreaves owns shares of Prudential. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.