Shareholders in Aviva (AV.) have had a miserable time these past two years. Their company's share price has fallen 16 per cent - and at one point was down 39 per cent on its high point - while shares in its big rival, Prudential, have risen by 32 per cent. Disgruntlement came to head in May when a shareholder revolt prompted the resignation of chief executive Andrew Moss.
- Restructuring gaining pace
- Big cost savings coming through
- Building up surplus capital
- Attractive dividend yield
- Exposed to weak areas of Europe
- More restructuring costs likely
It can take time to find a suitable replacement, and it was only in November that Mark Wilson was named as Aviva's new chief executive. Formerly the boss of a leading Asian insurance group, AIA, he engineered that company's share flotation on the Hong Kong stock exchange in 2010 and has 25 years of experience in the insurance industry.
But changes at Aviva have already been put in place by chairman John McFarlane, who is the temporary chief executive until the end of the year. A business review concluded that Aviva must cut its global commitments and concentrate on areas identified as offering a decent return. This involves reducing Aviva's 58 business segments. Of these, 16 have been labelled 'non-core', while a further 27 will have to pull their socks up or face the chop. All this will come at a cost, however, and more restructuring expenses can be expected on top of the £186m incurred in the first half of the year.
So the task is daunting but necessary, considering where Aviva makes its money. In 2011, operating profits were up 6 per cent at £2.5bn, but of this just £70m came from the Asia Pacific region, regarded as one of the prime growth areas. More worrying is the group's exposure to some of Europe's weak men - Italy, Ireland and Spain - where new business volumes continue to fall.
While the full benefits of the restructuring are unlikely to show through until 2014, steps are being taken to streamline the operation. That also allows Aviva to rebuild the strength of its balance sheet and progress has been good. By the end of October, Aviva's capital in excess of regulatory requirements had risen by £0.6bn since the end of June to £3.7bn. More cash can be expected from the sale of the Sri Lanka business and the disposal of the US life and annuity business, albeit for prices well below book value.
| AVIVA (AV.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 345p | MARKET VALUE: | £10.2bn | |
| TOUCH: | 344-345p | 12-MONTH HIGH: | 385p | LOW: 251p |
| DIVIDEND YIELD: | 7.5% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 402p | EMBEDDED VALUE: | 421p | |
| Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 34.7 | 2.02 | 37.8 | 24.0 |
| 2010 | 36.3 | 2.83 | 50.4 | 25.5 |
| 2011 | 32.1 | -0.09 | 5.80 | 26.0 |
| 2012* | na | 2.49 | 42.2 | 26.0 |
| 2013* | na | 2.66 | 46.6 | 26.0 |
| % change | – | +7 | +10 | nil |
Normal market size: 7,000 Matched bargain trading Beta: 1.8 *Investec Securities estimates (profits and EPS are not comparable with historic figures) | ||||
Few stones are being left unturned in the drive to improve efficiency. Four levels of middle management have been removed from the UK, and by the end of 2012 the plan is to have locked in cost reductions of £250m a year, with a target of £400m. Steps have also been taken to spruce up the general insurance side, formerly known as Norwich Union. This part of the business is running decent underwriting profits with a combined ratio (of claims to premium income) of 97 per cent in the first nine months of 2012. True, net written premiums over that period were flat at £3.1bn, but this reflects a decision to be more choosy about new business.
Now might be the time to lock in the likely benefit of the Aviva's changes on the share price. After all, at 345p, the price is well below the forecast for year-end embedded value of 457p a share from broker Investec Securities. While the dividend won't grow for some years, the yield on the likely payout is still 7.5 per cent (see box below).
