Thursday, 17 May 2012

Aviva Interim update; solid start to 2012 (but still sinking on Euro concerns).

I'm starting to get that sinking feeling myself now and feel particularly exposed to the scare stories that will no doubt start to dominate every scheduled news program and across all media channels.
The IMF Managing Director, Christine Lagarde has started the poker game rolling with a figure of $1 trillion as the cost of a Greek exit.

Not sure what to read into the French born Mrs Lagarde quoting in dollars for a Euro problem, probably nothing given the basis of the IMF!

As a consequence Aviva is starting to prove painful to my portfolio now given its position in the financial services sector with a declared estimated exposure as follows:

*Aviva (AV.LN): Shareholder exposure to debt securities of the governments of Greece, Spain and Portugal is GBP900 million. Includes GBP150 million exposure to Greek debt. ( AT A GLANCE: Europe Bank, Insurer Exposure To Weak Economies).

Even the extent of £0.9 bn doesn't seem as bad as feared to a business and sector who's bread and butter is dealing with risk and disasters. But will there be a further unquantified risk from other sources and other financials that are indirectly invested in the Euro's fortunes?

Aviva's interim trading statement announced today ( A solid start to 2012) also had some positives with its solvency ratio coming in slightly better than expected at 151% which basically means that its proportion of net assets is 151% relative to the insurance premiums that have been written in the year and are expected from customers.
All a bit complicated to me but I guess that premiums not being paid is a risk to the company's cashflow and therefore requires coverage by assets should an actual insurance event come about.

The 151% figure is slightly higher than February's 150% despite £300m of dividends being put to one side for payment to shareholders.
The 151% effectively equals a surplus of around £3.2bn.
Sales were up and down across its key market particularly in the Eurozone but at least seem to have been in line with forecasts i.e. no real surprises.

But having enough capital to weather current and future events, and anticipated regulatory changes seems to be the major concern. 
As does the uncertainty created by the lack of a CEO following Andres Moss's departure.

To that effect, Aviva's newly installed Executive Deputy Chairman, John Macfarlane also made the following comments:

“Although the economic environment remains uncertain, we have delivered a solid operating performance during the first three months of 2012 and profitability in both our life and general insurance businesses is in line with targets.
“We have begun the process of identifying a new CEO for the Group, internally and externally. We expect this will take the remainder of this year, as we need to appoint the best person in the world available to us. In the interim, I will act as Executive Chairman to ensure we take the necessary actions and decisions to improve the standing and performance of the Group, and to accelerate these actions. I am excited to be playing a pivotal role at what is clearly an important time for Aviva.
“My first task is to make an improvement in the capital and financial strength in the group as well as an improvement in our financial performance. Whilst not underestimating the significance of the challenge I am optimistic of the outcome.
“To this end, last week I announced a new set of priorities for Aviva:
  • Firstly a strategic review of all our businesses to ensure we are focused on the right segments; that we put in place plans to advance the performance and position of our businesses strategically, and exit sensibly those that are not part of our future. These will be reviewed by me and subsequently the Board in June, and we will provide an update to you in July.
  • Secondly to build the capital base and improve the balance sheet strength of the group.
  • Thirdly a profit and value improvement programme involving the dynamic reallocation of capital across our businesses, identifying sources of segmental revenue growth, and improvement in our operating margins and return on capital.
  • Finally a continuous advancement in the foundation of the group and our position with all stakeholders and a frank and open communication with shareholders.
“Aviva has a strong brand, dedicated people and I believe the business has a great future.”

So no real surprises then with Capital and margin improvements identified as priorities and expectation that the Chairman designate will bridge both CEO and Chairman roles until a new CEO is appointed which could take the remainder of 2012.

Following this Interim statement, the broker Nomura has continued to take a very positive take on the company with a possible re-rating to 600p per share ( Broker snap: Aviva could be in for a re-rating, says Nomura).
I would suggest that given the wider risk from the Eurozone not all brokers have the same view.

I still have some cash in the portfolio but given the nature and source of current risks and the probably protracted nature of any resolution (good or bad) I am feeling fully exposed to Aviva although this might change given time and share price movement. 
Ultimately for me, confirmation of the company's commitment to its dividend strategy would prove very comforting.

On that final point a gratefully received 16p per share landed in my account today.

Aviva @ 271.7p, - 9.2p (-3.28%) as at 12:28

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