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Disposals boost for Aviva

Life assurer Aviva is on course to slim down its global operations and boost its capital reserves - yet the shares still look cheap compared with embedded value
January 10, 2013

What's new

■ US life and annuity unit is being sold

■ Spanish joint venture being sold

■ Solvency ratio now on a par with rivals

IC TIP: Buy at 383p

Life assurer Aviva (AV.) has continued to make steady progress with slimming itself down into a leaner and more efficient operation - it announced the sale of its US life and annuity business for £1.1bn last month. Aviva has been particularly keen to offload this operation as the annuity business - which offers policyholders guaranteed returns - is particularly capital intensive.

Last month Aviva reached an agreement with nationalised Spanish bank Bankia through which it will transfer its entire holding in joint venture Aseval to Bankia for £494m. The deal brings to a close a clash between the two after Aviva's original joint venture partner, Bancaja, was swallowed up along with six other Spanish savings banks to form Bankia.

Crucially, both deals will help to strengthen Aviva's capital position and, on a pro-forma basis, the transactions are set to increase the group's Insurance Group Directive (IGD) surplus solvency ratio from 165 per cent in September to 172 per cent. However, there is a downside to the US disposal -the sale price represents less than half the book value and Aviva will make a £2.3bn writedown on the deal.

 

Panmure Gordon says…

Buy. Aviva has made great strides in improving its financial strength - its economic capital surplus has risen from around 142 per cent at the half-year stage to 165 per cent following the US and Spanish sales. This brings it up to the group's internal target range and puts it on a par with its European rivals. Aviva now enters 2013 with a narrower focus, an improved balance sheet and the prospect of further benefits ahead from disposals, business improvements and cost savings. The valuation remains attractive - our price target stands at 425p - and the chance of a maintained dividend (meaning a 6.8 per cent prospective yield) has increased as a result of the two disposals. Expect EPS of 49.95p for end-2012.

 

Citi Research says…

Neutral. The sale price for the US unit was higher than most had expected although, after the debt repayment, it represents only about half the US operation's tangible book value. Even so, the sale is a positive move - in terms of price, delivery on the group's strategic plan and the boost to economic capital that it achieves. But our price target stands at 346p - based on a simple average of valuations based on our sum-of-the-parts price, our return on equity model and our embedded value-based model. And we have a high-risk neutral stance on the shares.