Aviva Beats Prudential as U.K. Market Turns Tables on Revenue
Aviva Plc, the loser in a bad year for
U.K. insurance stocks, is the forecasters favorite to make money
this year.
Aviva, Britains largest insurer by sales, fell 18 percent in
2007 trading, almost twice as much as the FTSE All-Share Life
Insurance Index. The London-based company, with roots going back
three centuries, did worse compared with Prudential Plc, which has
overtaken Aviva as the U.K.s biggest insurer by market value.
Prudential rose 1.8 percent in London trading last year on its
growth prospects in Asia.
The tables are turning this year as analysts favor companies
that wont be ruined by asset writedowns or an economic slump.
Eight out of 10 say buy Aviva, and none say sell,
according to ratings compiled by Bloomberg. Analysts, on average,
predict a 40 percent increase in Aviva this year.
Aviva has better growth prospects than Prudential if we have
a serious slowdown in the U.S. and if Asia follows, said Kevin
Ryan, an analyst at ING Financial Markets in London who has a
buy rating on both. Aviva is uniquely placed to weather the
challenges that are slowing economies around the globe.
Chief Executive Officer Andrew Moss told investors on Feb. 6
that hes sticking to earlier growth and profit forecasts for
2008, even as recessionary pressure increases in the U.S. and
Britain. The company has enough cash to support its dividend yield
of 6.3 percent, the highest among U.K. insurers, said Youssef Ziai
at ABN Amro Holding NV.
`No Good Reason
Aviva has been shunned by the market for no good reason,
said Ziai, who has a buy rating on the shares.
Aviva rose 4.7 percent this week to 579 pence in London
trading, valuing the company at 15.2 billion pounds. The stock is
still 23 percent below its embedded value of 737 pence a share,
said Bruno Paulson, a London-based analyst at Sanford C. Bernstein
Co. Embedded value, which includes assumptions about investment
returns, is the most widely used measure of insurers book value.
Its cheap, said Paulson, who rates Avivas stock buy
and predicts it will rise to 900 pence.
Prudential, which defeated a 16.9 billion-pound takeover
attempt by Aviva two years ago, is more expensive relative to
earnings. The company, led by CEO Mark Tucker, trades for more
than 10.3 times estimated 2007 profit. Avivas multiple is 8.
With 45 percent of sales coming from Asia, Prudential will
probably say March 14 that operating profit rose 37 percent in
2007 to 2.6 billion pounds, according to Ryans preliminary
estimate. Aviva may say 2007 operating profit fell 5 percent to
3.1 billion pounds, Ryan said. Aviva reports on Feb. 28.
Asia Slowdown
Prudential has a lot of business in the Far East, which is
why a lot of people hold it, said Dave Bradbury, who manages
about $6 billion, including Prudential and Aviva shares, for
London-based Canada Life.
Prudentials Asian advantage may diminish this year. Sales
growth in Asia will slow from 44 percent in 2007 to its longer-
term trend of about 25 percent, Prudential said Jan. 29. The
company didnt provide an overall sales forecast.
A deep and prolonged recession, should it occur, could be
accompanied by much slower growth in Asia, Asian Development
Bank Chief Harukiko Kuroda said at a conference in Tokyo this
month.
A slowdown may raise concern that Prudential shares are too
expensive, said Colin Morton, an analyst at Rensburg Fund
Management in Leeds, England.
Bigger Dividend Yield
If Prudential delivers on its numbers, then its valuation
is justified, but with extra growth there comes extra risk, and if
there is a big downturn in Asia, that will have an impact, said
Morton, who helps manage about 1.5 billion pounds, including Aviva
and Prudential stock.
Among 27 analysts following Prudential, 16 say buy, nine
say hold, and two say sell, according to ratings compiled
by Bloomberg.
Prudential has less room than Aviva to raise its dividend.
The insurer uses 59 percent of profit to pay a dividend yield of
3.` percent, whereas Aviva uses about 46 percent of earnings for
its dividend, figures compiled by Bloomberg show.
INGs Ryan estimates that Avivas healthy balance sheet
means it can raise its full-year dividend by 10 percent.
Aviva shareholders will also get 230 million pounds in a
special bonus as the company returns surplus assets that have
accumulated in two life insurance funds, the company said Feb. 5.
The chief challenge facing Aviva is the slow-growing U.K.
insurance market. Legal General Group Plc, Britains No. 3
insurer, said the deteriorating real estate market will hurt sales
of mortgage-related insurance products, while proposed changes to
capital gains tax have reduced sales of some investment products.
`Credible Strategy
Aviva said Feb. 6 that it expects to meet targets for annual
sales growth of at least 5 percent in the U.K., 10 percent in
Europe and 20 percent in Asia. The insurer gets 11 percent of new
life insurance business from the U.S. and said it can double sales
within three years of 2007s $3.1 billion acquisition of Des
Moines, Iowa-based AmerUs Group Co.
About 47 percent of Avivas life-insurance sales come from
continental Europe, including France, Italy, the Netherlands and
Spain. The company merged its Turkish life insurance and pensions
unit with Haci Omer Sabanci Holding AS in November to create the
countrys largest pensions provider. Aviva gets 4.5 percent of
life-insurance sales from Asia and agreed last month to buy a
stake in South Koreas LIG Life Insurance Co. for $145 million.
Aviva has a credible strategy for growing its business,
even in a slowing environment, said Ryan of ING.
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