Even though investors are encouraged to focus on the long term, timing still has a lot to do with share price performance. In the case of global (but UK-focused) insurance company Aviva (NYSE:AV), timing really isn't on the company's side. While this looks like a pretty respectable long-term business, balance sheet issues may well force the company to sell assets at a time when valuations are quite low.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Current Results OK, but Showing Some Stress
Aviva's present results aren't terrible, but they certainly show that growth is not easy to find in a business heavily weighted towards Europe.

Life and pensions saw a 7% decline in premiums (on a continuing operations basis), with major declines in markets like Ireland, France, Spain, Italy, Poland and China. The U.K. business was not terrible (down 3%), and the U.S. results were actually up strongly though on an easy comp. With good overall investment sales, the combined "long-term savings" (life insurance and annuities, mostly) saw a 5% year-on-year decline. The smaller general insurance business fared better though, with flat year-on-year premium revenue.

Capital Forces a New Direction
Compared to other European insurance companies like Allianz (OTC:AZSEY), AXA (OTC:AXAHY), Prudential PLC (NYSE:PUK), and Old Mutual (OTC:ODMTY), Aviva is pretty heavily leveraged. That has allowed the company to push up its returns on equity and post better earnings performance, but Aviva is now having to pay the piper.

The markets have turned against highly-leveraged insurance companies and Solvency II regulations are going to force the company to reduce that leverage. What had been a tailwind for the company, then, is now set to be a headwind.

Unfortunately for Aviva, this is a tough time to restructure its business. The company is going to talk to investors about its plans on July 5th, but the general assumption now is that it will sell down its Delta Lloyd stake, sell its U.S. business (which is mostly variable annuities), and maybe also sell some combination of the Canadian, Spanish, Italian, and Polish businesses.

Selling down Delta Lloyd and selling the U.S. business make a certain amount of sense; they have added a lot of volatility to the business and the variable annuity business (in general) has come to be seen as more trouble than its worth. Unfortunately, this is the wrong time to be selling these businesses. The cost of equity has soared for the insurance sector and life insurance and annuity businesses are not in demand at all. What's worse, Hartford (NYSE:HIG) is looking to sell its life business as well and there's a limited number of potential buyers (MetLife (NYSE:MET), Lincoln (NYSE:LNC), and Prudential (NYSE:PRU)).

SEE: Investing In Health Insurance Companies

The Bottom Line
With Aviva forced to sell assets and raise capital at a time when its assets carry trough values and share capital costs dearly, to say nothing of the need to find a new CEO, it's likely that the next few years aren't going to be too impressive in terms of reported financial performance. So while the company has a solid UK/European insurance business, it's going to be hard for the company to outperform - outperformance may have more to do with getting better prices for its assets than anything else.

Perhaps not surprisingly, Aviva's shares are not robustly priced. Even granting a bottom-basement price for the U.S. business, high single-digit return on equity in five years' time would still support a low teens share price. There's value here, but investors need to be realistic about the challenges in front of the company, the probability of a dividend cut, and the possibility that these shares will struggle to move substantially higher until a clear plan is in front of investors.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!