Ahead of schedule
Since I last wrote about Aviva (LSE: AV) the fortunes of its shares have barely changed — so far into the year, they have had a pretty terrible time.
After entering 2015 with a bang and giving a 10% return for investors during Q1, they have since recorded losses of 20% from their peak during Q2 and even today, remain marginally below their December 2014 level.
However, this week’s interim update should provide hope. This is because the group reported a generally positive performance, while the official announcement also declared that the integration of Friends Life into the Aviva group is running ahead of schedule.
During the first nine months of 2015 the group’s value of new business, which is Aviva’s preferred non-GAAP measure of performance, rose by a nominal 20% and by 25% on a constant currency basis.
In terms of costs, Aviva recorded £91 million of synergies from a projected total of £225 million in relation to its acquisition of Friends Life. The group will also assume control of £23 billion of assets when they are transferred from AXA Investment Managers in November.
Furthermore, management claims to remain confident in both the group balance sheet as well as its capital surplus level ahead of implementation date for the Solvency II regime in January.
Not be the cheapest
Like Aviva, Standard Life (LSE: SL) is another life insurance sector constituent that has also turned to acquisitions to boost growth during recent periods, with at least part of the impetus for this coming from the claustrophobic environment for bond markets and downward pressure upon investment returns.
However, with acquisitions aside, Standard Life’s third quarter update shows that the group is still attracting a healthy level of inflows into its investment management arm. At the group level, management noted £10 billion of net new business during the first nine months of the year, which should bode well for earnings over the medium to longer term.
Standard Life also said that its investment performance had remained strong and ‘ahead of the benchmark’ during the year to date, which should bode well for group earnings in the current year as well.
Despite the positive financial performance, in this case, investors would probably do well to consider that Standard Life may not be the cheapest of the pack. With a forward price/earnings ratio of 16.5x, the group appears expensive when stood next to the current industry average of just over 13x and Aviva’s discounted 10.4x multiple.
For this reason, it seems sensible to suggest that if there were any one company whose shares are vulnerable to weakness during the near term, Standard Life would probably be a contender for this position.
A slow burn
There probably wouldn’t be much disagreement among shareholders with the assertion that growth in both underlying businesses will probably be a bit of a slow burn from here.
However, and despite any short term noise over current valuations, I still believe wholeheartedly that when it comes to life insurers staying invested will probably pay off for investors over the longer term as interest rate increases eventually begin to feed through to instruments at the longer end of the yield curve.
