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Where now for Aviva, Prudential and Legal & General share prices?

Its been a mixed year for many British insurers as they do their best to remain resilient in the face of a myriad of headwinds that have hurt their performance and applied downward pressure on share prices.

Trader Source: Bloomberg

Over the last 12 months of trading, many British insurers continue to face many challenges, a fact reflected in their share price, with Aviva, Prudential and Legal & General (L&G) all seeing their stock slide more than 26%, 19% and 11% respectively.

IG looks at what the future has in store for UK insurers as attempt to navigate the challenging insurance market.

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Aviva puts Asian businesses under review

Aviva did not disappoint investors in its half-year results, building on its strong foundations, but it didn’t manage to excite them either, with the insurer left with lots to improve upon.

In its first six months of trading, Aviva’s operating profit rose by 1% to £1.4 billion and saw its interim dividend increase by 3% to 9.5p a share. Its flat, though stable, set of figures were reflected in its share price which has fallen by 4% in the days since its latest trading update.

The slight uptick in profit was driven by the company delivering a decent performance in general insurance with a combined ratio of 95.9%. But this was offset by operating profits declining across its life insurance and asset management units, with the insurer blaming challenging market conditions for its weaker performance.

Aviva’s management used its half-year results to inform investors that it has decided to review strategic options for its Asian businesses.

Tulloch’s predecessor, Mark Wilson, began the process of transforming Aviva into a leaner operation with a focus on generating cash and financial stability, with the new CEO clearly looking to pick up where he left off.

Aviva has disposed of many of its satellite businesses, with the insurer using the proceeds to invest in larger more profitable units and acquiring the likes of Friends Life and RBC’s general insurance unit.

Aviva is now turning its attention to trimming the fat across its Asian businesses in a move that will leave the group with plenty of cash to help it hit its Solvency II target of 150% - 180%, as well as reducing debt and returning value to shareholders.

Prudential demerger talks continue

Unlike Aviva, Prudential – the UK’s largest insurer – is happy with its Asian business’ performance, with it generating a 38% increase in operating profit last year, driven by rising demand for insurance products by China’s burgeoning middle-class.

Despite strong growth in the Asian market, Prudential’s share price has struggled to make significant gains, with it up just 1.5% on a year-to-date basis, closing at £14.12 a share on Tuesday.

Its share price would likely be much higher given its strong growth had it not been for the ongoing US-China trade war which has led to investors fearing another global recession is on the cards in the near-term.

However, if the two largest economies can settle their differences soon, the insurer could see its share price make significant gains, with the company investing heavily in the Chinese market and relying on it to drive profits.

Prudential is also near to completing its complex demerger. Once completed the company will be split in two with M&GPrudential responsible for its cash generative UK and European operations, while Prudential PLC will handle its high growth US and Asian businesses. Investors will see their existing shareholdings split down the middle of the two newly formed companies.

Investors uncertain despite Legal & General posting strong profits

Earlier this month, L&G recorded an 11% rise in operating profit to £1 billion, driven by a significant increase in corporate pensions deals. Its strong half-year results also saw its earnings per share rise by 13% to 14.74p per share and generate a return on equity (RoE) of 20%.

‘We have a depth of management, track record and opportunities that mean all five of our businesses should contribute to future growth,’ L&G Group CEO Nigel Wilson said.

‘We are well-prepared for the full range of foreseeable Brexit outcomes and we remain confident in our ability to deliver Inclusive Capitalism, growing value for shareholders, customers and the broader economy,’ he added.

But despite its impressive performance, investors remain sceptical about its long-term prospects, with L&G heavily dependent on the UK market, with its economy weakening and future growth threatened by the threat of a no-deal Brexit.

In an attempt to offset this, L&G plans to reduce dependence on the UK market by expanding its footprint geographically.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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