The insurance sector is a bet for brave investors right now, and that shows in the recent share price movements of Aviva (LSE: AV) and Prudential(LSE: PRU), both of which have underperformed the FTSE 100 by five percentage points in the lastfour weeks of trading.
Performance
Avivahas risen 10% since the turn of the year buthas struggled to deliver value in recent weeks, with its shares down 5% in the last month of trading, after a +12% performance in the first quarter, excluding dividends. Its second-quarter performance reads -2.4%so far.
Not only do investors seem reluctant to back Aviva, but itlooks like a lot of scepticism also surroundsPrudential, whose stock has risen 10% since the beginning of 2015. Its Q1 performance is in line with that of Aviva, but the shares have equally lost ground in the lastmonth of trading. Finally, Prudentialis down 1.4% in thesecond quarter, which compares with +3.7% for the FTSE 100.
Time To Add Risk?
It may be time to add exposure to both companies if you are willing to take insurance risk and add some volatility to your portfolio.
As you should know by now,in order to add Aviva to your portfolio you must have faith in its 5.6bn acquisition of Friends Life; meanwhile, if you are planning to invest inPrudential, you must assume thatits new chief executive and its hiring strategy will manage to please institutional investors.
Aviva
A top-down approach suggests that regulatory risk could be significant, although a few analysts revised their price targets to between 600p and 700p earlier this week. The stock trades at 535p and could easily surge to 600p, based on fundamentals and trading metrics. Its forward earnings multiples for 2015 and 2016 are 11x and 10x, respectively, with a forward yield at 3.8% and 4.6%.
Of course, much of its fortunes hinge on the successful integration of Friends Life, a deal promising hefty synergies that should support managements bullish views on cash flows and dividends. Pay attention to operating margins as well as updates on core cash flows and dividend cover when Aviva reports its first-quarter results on 7 May.
Prudential
Mike Wells, head of Prudentials US business and the executive most widely tipped to succeed Thiam was the companys second highest paid board member, earning total compensation of 11.39 million pounds, Reuters reported at the end of March its beenradio silence since then.
In truth, a new boss should have been appointed by now, but alack of leadership is only partly to blame for Prudentials disappointing performance in recent times.
Based on trading multiples, Prudential is 30% more expensive than Aviva, with a lower yield at 2.4% and 2.7% in 2015 and 2016, respectively. Its more conservative dividend and corporate strategy signal less risk, but then its stock isnt exactly in bargain territory. Thats something its new chief executive should consider.
These elements are important because a lot of risk is associated to capital adequacy ratiosin the insurance sector and it’s likely that weaker players will merge or will sell assets to preserve earnings in a tough trading environment characterised by low interest rates.
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Alessandro Pasetti has no position in any shares mentioned. 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.