Aviva update

Aviva came back to the market yesterday with an interim management statement for its first quarter period ending 31 March 2011.


All seems to be good news at this point with:
- a 20% rise in sales to £1.09bn (over the same quarter last year) which represents the 5th consecutive quarter of increased sales.
- 580,000 new motorist customers added in those 5 quarters bringing the car insurance client base to 2,000,000.
- average premiums increased by: 24% on car insurance; 6% on home insurance; and 10% on commercial business.
- an extension to 2016, of its UK distribution contract with HSBC along with the added bonus of being the banks preferred strategic partner across mainland Europe.


Apparently, the Paul Whitehouse led advertising campaign has been a success as well.


I also assume that the increase in premium is not isolated to Aviva as the industry has for some time now warned that premiums would be increasing particularly after a number of natural disaster and trends affecting claims. 
Alongside the obvious natural disasters, I am thinking new entrant price wars, and the growth of the claims (particularly with motoring) related to organised fraud.


Highlighting one decreasing number, the company did declare a fall of 14% in its new life insurance business as the company executes its strategic intent to rotate out of less profitable areas/regions into its established core marketed regions.


Strangely the company did also refuse to comment on the progress of its plans to sell the RAC, which it purchased in 2005 for £1.2bn.
Does that suggest that there are few takers in the current climate, or that the sales may not recover the £1.2bn that Aviva paid for it? 
We shall have to wait and see.


Another spot of good news came with the statement that Aviva "has no exposure to the recent natural disasters in Australia, Japan and New Zealand, which have landed the insurance industry with a $30bn (£18.5bn) bill."

Possibly more by luck than any powers of prophecy I would suggest, but it is good news nonetheless.


So, with Aviva @ 436.4p, +0.8p (+0.18%) the share price is:
- up 48% on its 52 week low of 294.2p
- 9.5% away from its recent 52 week high of 477.9


The shares continue to trade on a forecast Price to Earnings ratio of 7.5 times with a forecast yield of 6.2% and the cash balances, closing at £25.455bn for the last financial year, have almost doubled in the last 5 years.


In the last Annual accounts, the Cashflow per share at 64.91p was higher than the declared earnings per share of 55.1p (but with insurance premiums generally being collected prior to services being delivered I would have expected this).
The dividend is more than twice covered by earnings which gives some comfort that they will continue to pay it.


So, the investment in Aviva seems to have performed as expected without ever seeming to have become overextended. In fact, with the potential for more capital gains and a chunky dividend, it continues to look like an opportunity to buy some and lock them away for the next 5 years.
There will always be the risk of exposure to market declines; increasing financial regulation; and natural disasters (the nature of the industry I'm afraid), but, if the management is capable then then it will manage its cashflows and cash reserves through these dangers.
As it stands, premiums are increasing, and with this just being the 1st quarter, there is potentially a solid increase to full year profits to look forward to. One step at a time though!


How has Aviva performed for the portfolio then?
Well, at 436.4p the shares are currently showing a 16.23% capital gain in the virtual portfolio.
And, having just paid out another dividend today, they have also yielded a further 5.5% which gives a total gain of 21.8%.


Should we see a pull back in the market over the next few months I might actually be tempted to add some more to the portfolio although my preferred option would still be to diversify by picking up some other quality blue chips (with good yields) providing essential products or services, such as pharmaceuticals, telecoms; and consumer goods.


Related articles:
- www.guardian.co.uk: Aviva raises insurance premiums – but gains customers
- thescotsman.scotsman.com: Aviva continues sales successes
- www.independent.co.uk: Aviva's UK sales motor ahead


Related posts:
- April 2011: Portfolio Update
- Arriba Aviva