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 ofAviva (LSE: AV) or Prudential (LSE: PRU)?
Frankly, I am not particularly upbeat about any of these three insurers, and heres 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 likethe insurer could soon be taken over by Switzerlands Zurichfor up to 600p a share, which would value the business at up to 6bn, for arichforward net earnings multiple of20x.
RSA in back on the right track after a few difficult years, but it remains a turnaround story. Based on trading multiples and fundamentals, its 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 doesnt seem conceivable, also considering the risk that Zurich may not put forward any formal offer.
RSAs 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 insurers resultsmissed 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.
Theres potential in RSA but theres risk, too and inherent operating riskis not reflected in its current valuation at a time when its uncertain how newregulations 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 Prudentials 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 Prudentials 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 doesnt 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 Allianzs 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.
A Big Headache?
The problem for insurers is that investors can secure even higher forward yields, backed bystronger growth rates and higher profitably,investing incompanies that operate in less cyclical sectors,and this is likely to be an opportunity for some time in this low-rate environment.
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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.