What's new
■ UK annuity sales have slumped
■ Strong overseas growth
■ Turnaround efforts continue
On the face of it, life assurer Aviva's (AV.) recent performance looks comforting. Overall, the value of new business (VNB) sales in the first quarter rose 13 per cent year on year, and the group delivered especially strong growth in Asia and various parts of continental Europe. Management also insists that progress continues with the group's turnaround strategy, which is focused on debt reduction, cost-cutting and exiting non-core operations.
But UK VNB, which accounts for over half of the total, fell 22 per cent in the first quarter, driven by weak annuity demand. Annuity VNB actually slumped 43 per cent, but this wasn’t mainly down to the Budget day decision to scrap compulsory annuity purchases, which came too late in the quarter to make a big dent. The slippage had more to do with tough comparatives after an exceptionally strong first quarter in 2013. Moreover, Deutsche Bank estimates that just 1 per cent of Aviva’s operating profit last year was generated by new annuity sales, so annuity-related pressure isn’t necessarily a huge worry.
Aviva’s general-insurance arm, meanwhile, saw its combined ratio (of claims to premiums) deteriorate by over 2 percentage points to a barely profitable 97.7 per cent. That reflected increased UK weather-related claims, although sliding motor premium rates aren’t helping.
Shore Capital says
Sell. Despite reporting fairly innocuous first-quarter figures, strategic challenges continue to weigh heavily on Aviva. Even though the intercompany debt pile is reducing, external borrowings still look high - and that’s likely to constrain dividends. Forging a single group identity is another challenge. Aviva is an amalgamation of operations like Norwich Union and General Accident, and each business unit has a different culture. After a strong run, the shares now look priced to perfection: they’re not cheap compared to embedded value (EV), while those of sector peer Legal & General (LGEN) offer a fatter yield. Any hiccups in the turnaround effort and those gains could be lost. For 2014, expect EV of 469p, operating EPS of 46.3p and a 16p dividend.
Oriel Securities says
Hold. With only modest exposure to fast-growth markets like Asia, Aviva could struggle to generate significant growth. Management’s decision in late 2012 to sell the US business hasn’t helped, either: while the US operation was capital-intensive, it at least faced decent market growth. Moreover, as Prudential’s (PRU) experience in Asia has demonstrated, building a significant presence in faster-growth overseas markets takes time. Reflecting the company's turnaround potential, the shares have risen strongly in recent months. The current premium to embedded value leaves them trading up with events.
