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While the FTSE 100 index has climbed this year, the Aviva (LSE: AV.) share price hasn’t participated in the rally. Year to date, it’s down about 9% (versus a near-5% gain for the Footsie).
So, what’s going on here? And is now a good time to consider buying?
A new risk for Aviva and its shareholders
This may sound strange, but I think the share price fall here is related to AI fears. In the same way that software stocks have been hit by disruption fears recently, insurance stocks are now in the firing line.
One reason for this is that AI stands to empower consumers, enabling them to find the absolute lowest price in the market for the insurance policies they need with minimal effort. If consumers start using AI agents to continually monitor the market, and constantly switch providers the moment a cheaper rate appears, it could lead to a race to the bottom on premiums and lower profit margins across the industry.
Another issue – and this is quite relevant to Aviva – is the emergence of self-driving cars and robotaxis. As AI takes over driving in the years ahead, liability may shift from the individual driver to the vehicle manufacturer (like Tesla or Waymo). Meanwhile, if these cars significantly reduce accidents (which data suggests they may be able to), the total pool of premiums for motor insurance may shrink dramatically. This could be a problem for Aviva since nearly a quarter of its profits come from personal motor insurance at present.
This latter issue was highlighted by analysts at Barclays recently. They aren’t forecasting an imminent earnings decline for firms like Aviva, but have warned that insurers may start to be viewed as structural losers in the AI era and that those vulnerable to AI disruption could see further share price drops of 5%-25%.
An investment opportunity or a risky stock?
As for whether the drop has created a buying opportunity, I think it possibly has. We can’t ignore the AI risk – this is definitely something to think about.
However, I can’t see AI blowing up Aviva’s business any time soon. For example, I think it’s going to be many, many years until self-driving cars are mainstream in the UK and before few people are buying motor insurance.
After the recent share price fall, the valuation and dividend yield look quite attractive to me. The forward-looking price-to-earnings (P/E) is around 10 while the yield is around 6%.
To my mind, there’s a decent margin of safety at those levels. It’s worth noting that analysts at Peel Hunt recently initiated coverage of the stock with a Buy rating and a target price 755p – about 20% above the current share price.
So, on balance, I think the shares are worth a closer look today. But there are plenty of other UK stocks that look interesting as well.
