U.K. Life Insurers: Avoid the Winner, Look at the Underperformer
We think Prudential is overvalued and investors could be better off with Aviva.
The recent stock performances of Prudential (PRU)/(PUK) and Aviva (AV.)/(AV)--both no-moat U.K. insurers--couldn't be more different. While Prudential's share price doubled in 2012, Aviva's shares remained sluggish. We think Prudential's risk has elevated significantly and the market valuation cannot be justified based on the company's prospects. On the other hand, we think Aviva has made some tough decisions to derisk its balance sheet and strengthen its capital position. Although we don't see Aviva as a growth company, we give it credit for being a safer company with higher predictability of cash flows. As a result, we would prefer an investment in Aviva to one in Prudential.
No-Moat Insurers See Sales and Margin Growth Under Pressure
A large part of Aviva's business in the United Kingdom and Europe is with-profit contracts (called participating life policies in the United States), which we think are commodified products that command no brand loyalty and can be replicated easily by another carrier. The company attempted the One Aviva campaign in hopes of increasing brand recognition and cross-selling life and general insurance, but we don't see any strong evidence that the campaign achieved its goal. The company distributes its products through an agent network to retail clients and through bulk sales to corporates. However, without any cost advantage in selling generic products, Aviva does not have an economic moat, in our view. Total sales have been dropping for the past three years and margins have seen little expansion, reflecting an increasingly competitive environment.
Vincent Lui does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.