Aviva plc Ordinary 25p (AV.)

Company overview

Aviva plc is engaged in the provision of financial products and services, focused on long-term insurance and savings business, fund management and general insurance and health. The Company's business is managed on a geographic basis through a regional management structure based on four regions: United Kingdom, Europe, North America and Asia Pacific. The group has over 50 million customers and employs around 45,000 personnel. During the financial year 2010, worldwide sales of over £47 billion were generated, with the UK generating 35pc, Europe 46pc, the US 14pc and Asia 5pc.

HL Comment (3 November 2011)

The group's nine month trading update (03Nov2011) saw company expose to Europe dragging on performance. While overall General Insurance and health policy premiums rose by 9% to £7 billion, this only partially offset an 8% fall in long term savings sales to £23.6 billion. In mainland Europe, overall life and pension volumes declined by 18%. Management initiatives to write less capital-intensive business also played a part in the fall, with life and pension sales in France significantly down on prior year. Sales in the group’s US market place were also lower, down 24%, with Aviva attempting to maintain pricing discipline. Nonetheless, accompanying management comments suggested that the group remained on track to meet its financial targets for the year.

Negative Points:

• An 8% fall in long term savings sales to £23.6 billion was seen, with mainland Europe in particular impacting.
• Despite geographical diversity, some markets have proved less profitable than others. A withdrawal from such markets has reduced sales.
• The group's IGD solvency surplus (capital cushion) declined compared to the half year period, materialising at £2.7 billion as of 30th September 2011. This compares to £3.8 billion as of 31st December 2010. The figure had been adversely impacted by market movements seen in the third quarter of the year, particularly in interest rates and credit spreads in continental Europe, which had reduced the total by around £0.7 billion and, to a lesser extent, by adverse movements in equities and foreign exchange rates.
• The group's exposure to growth regions such as Asia compares less favourably than rival Prudential.
• Competition across both the group's arenas remains intense.
• Foreign currency exchange rate changes may impact revenues and profitability.

Positive Points:

• Accompanying management comments suggested that the group remained on track to meet its financial targets for the current financial year.
• General Insurance and health policy premiums rose by 9% to £7 billion.
• The group has previously pledged to focus on the markets where it is strongest – from around 30 countries, management previously highlighted plans to focus on the 12 markets which generate the highest return of group profits from life and general insurance operations.
• A number of business sales have been completed, including the completed sale of RAC for £1.0 billion and the sale of its Aviva Investors business in Australia. Aviva also previously reduced its shareholding in Dutch insurer Delta Lloyd from 58pc to 43pc, generating gross cash proceeds of £381m.
• Cost savings continue to be pursued, with cash generation proving a focus. Management noted that it remained "on track to generate £1.5 billion to £1.8 billion net operational capital this year and to achieve its cost and efficiency savings targets by the end of 2012".
• The current low interest rate environment continues to encourage investors to seek alternatives to cash deposits. Furthermore, with an ageing population increasingly responsible for its own pension income, savings companies such as Aviva should benefit.
• The company continues to pursue a progressive dividend policy. A 5% increase to the half year dividend was previously announced.

Consensus:

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.