Aviva plc Ordinary 25p (AV.)

Company overview

HL Update (25 April 2008)

The group’s recent first quarter trading update proved broadly reassuring, although it did underline the impact which deteriorating property markets have been having on the wider financial services industry - investment sales in the UK (-34pc) and Ireland (-30pc) were hit by the massive about turn in the popularity of commercial property funds. Furthermore, the performance of the group’s European business, Eastern Europe aside, was far from inspiring, although aided by the conversion of Euro generated profits into the weakening UK pound.

That said, overall Aviva did still make progress, offering both diversification in both geographical and business provision terms. The group’s financial standing remains strong and exposure to the more exotic credit market investments looks to be limited. In addition, management rationalisation programmes are still squeezing further cost savings from the business. On balance, market consensus opinion remains highly favourable in tone.

HL Comment (6 February 2008)

The country’s largest insurance company, which incorporates such famous brands as Norwich Union and Commercial Union, tried to become even bigger during 2006 as it launched a takeover bid for arch rival Prudential. Although viewed as strong in both its UK and European business coverage, concerns had been growing regarding Aviva’s relatively small exposure in growth regions such as North America and Asia. A takeover of the Prudential appeared to answer these concerns in one easy go, given its geographical strength in those regions. However, it was not to be and Prudential managed to convince investors that it had stand alone growth prospects.

In July 2006, Aviva then moved to strengthen its US presence via a £1.6 billion takeover of US insurance group AmerUs Group - the USA’s biggest provider of index-linked life insurance products. Recent fourth quarter sales numbers (06Feb08) again appear to have justified Aviva’s US acquisition. Total life and pension sales to the year end 2007 came in at £31.6 billion, up from £25.85 billion the previous year and ahead of the consensus forecast of £30.8 billion. North American sales enjoyed a 39pc increase, with Europe up 19pc and the UK witnessing a more mundane 6pc increase. Positive sales news follows confirmation that Aviva is to pay about just under half of its £5 billion surplus in its with-profits funds to policyholders in the form of a bonus.

Acting for negative investor concerns are worries that the group might overpay for any additional acquisitions it could potentially make. Furthermore, on a broader basis, concerns also persist as to any potential exposure to sub-prime related investments which the insurance industry might be holding. On the positive, healthy sales and profit progress continues to be made and the group offers substantial geographical diversification, along with a seemingly attractive dividend (4.98pc yield as of 06Feb08 – not guaranteed). On balance, market consensus opinion is currently resolutely positive in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 31st December 2004, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).