Few signs of a dead cat bounce in the insurance sector on Friday. Many of the big names remain in negative territory, including Aviva which plunged 33 per cent in the previous session.
Somewhat predictably, those evil short selling monsters in Mayfair are being blamed for the recent rout of insurers, as David Wighton of The Times points out.
Are life insurance companies the new banks? They seem to think so. Aviva, the largest British insurer, was blaming bear raids by short-sellers yesterday for the astonishing 33 per cent plunge in its share price. Investors seem inclined to agree, for other reasons, predicting that some of the big household name insurers, including Aviva, Legal & General and Prudential, will have to raise bucketloads of money from their shareholders.
See below for the recent performance of the UK life assurance sector.
(You’ll note it is below the 2003 FSA induced forced selling death spiral).
Insurance, of course, is not the easiest sector to understand at the best times, but here’s what we think is going on. And there is a parallel with the banking sector.
As it has done with the banks, the market, which is deeply sceptical of anything financial, is focusing on tangible net asset value to the exclusion of virtually everything else. And insurers are being valued accordingly.
Consider this from HSBC Securities.
In our view, the market is focusing on Aviva’s tangible net asset value. We estimate a 2008 TNAV of 128p, implying the stock is currently trading at 1.5x, which appears expensive compared with the sector trading at 1.3x 2008e TNAV. Non-life biased, better capitalised and arguably more defensive Allianz is trading at 1.0x 2008e TNAV.
Our TNAV estimate is based on IFRS equity (GBP11.1bn), less goodwill (GBP3.6bn) and intangibles and acquired value in-force (GBP4.0bn). Taking a less aggressive view on intangibles (i.e. deducting only GBP1.6bn and keeping acquired value in-force in TNAV) would yield a TNAV of 221p. However, we believe the market is likely to take the lowest number in the current environment.
Unfortunately pinning down the right balance sheet number is easier said than done, not least because of the introduction of a new reporting standard called market consistent embedded value (MCEV).
Back to HSBC again.
For investors still looking at embedded value numbers, Aviva reported a 486p 2008 MCEV per share, which is 26% below 1H08. Deducting goodwill reduces this to 348p and stripping out the illiquidity premium (GBP6bn) reduces the MCEV to 121p. Again, Aviva trades anywhere between 0.4x and 1.6x 2008e embedded value, depending on which number you pick.
Little wonder the insurance sector is highly volatile.
Related Links:
A rout at Aviva – FT Alphaville
Aviva capital concerns spark sector sell-off – FT.com
Shift to new reporting standard exacerbates impact of falling market on Aviva’s results – FT.com