James Moore: Changes at Aviva are a chance to get in at the bottom

Investment View: Perhaps some fresh thinking can pull this lumbering beast out of its malaise


Our view Buy

Share price 302.8p (+4.9p)

Legal & General

Our view Take profits

Share price 113.4p (+2.1p)

Does the resignation of chief executive Andrew Moss do anything to change the case for investing in Aviva?

Perhaps. When I last looked at the company in December I said that if performance didn't pick up Mr Moss would either lose his job or find himself dealing with a takeover bid.

The former has happened, and his comrade in arms Lord Sharman, chairman, is on his way out too. Perhaps some fresh thinking can pull this lumbering beast of the life insurance sector out of its malaise.

Mr Moss seemed addicted to management reshuffles and corporate restructuring, presumably with the intention of doing something to justify his enormous salary package.

The most recent of these lost Aviva some good people. On the plus side, while the US business was sold off at a loss (embarrassing), the remaining businesses were placed in two divisions: developed markets and high growth (sensible move). Now it is down to the company to get these working well for shareholders while continuing to sell out of businesses where it lacks the firepower to succeed.

It will also be the job of John McFarlane, the incoming chairman who will run the company for the next few months, to ensure executive pay packages work as well for shareholders as well as executives. The jury is out on that front. He's a former banker.

In the meantime, the shares have continued to slide. Events in the eurozone have been the driver, especially the renewed chaos in Greece.

That is a worry, but Aviva does still have a £3bn capital surplus over regulatory minimums. Investors have been concerned because of Aviva's exposure to Italian sovereign debt. It has £0.8bn directly plus £5.4bn through "participating funds" in which both shareholders and policyholders have an interest. Shareholders are on the hook for more of that £5.4bn than might appear because policyholders often enjoy guaranteed returns.

All the same, Aviva would appear to have sufficient capital to deal with a substantial haircut should Italy partially default on its debts. And if it gets to that point, it will be more than just Aviva facing problems.

The reason I said buy Aviva in December was simple: the shares had closed at 284.9p and that represented a huge discount to the value of Aviva's in force business. They are not much changed from that now which means Aviva is still trading at just 0.6 times the value of its in force businesses.

Based on earnings, the shares trade on just 5.3 times this year's forecasts while offering a barnstorming prospective yield of 9 per cent. The dividend is well covered and wouldn't appear to be under threat at the moment.

Aviva still has those governance issues, of which shareholders need to be aware.

But, notwithstanding worries about the eurozone, take the current imbroglio as a chance to get in at the bottom in the hope Mr McFarlane can sort out the mess. Buy.

The other life insurer that was clearly a buy when I last looked at Aviva in December was Legal & General, whose shares closed at 99.35p on the day the column was written. L&G struck me as a solid, safety-first pick. This it has proved to be, although the shares have started to ease recently.

L&G trades on 1.2 times the value of its in force business and 8.4 times this year's forecast earnings. That looks expensive compared to Aviva, but L&G doesn't have the eurozone worries of the former and has been managed sensibly and conservatively for as long as anyone can remember.

Yesterday, chief executive Tim Breedon's replacement was announced. He is (to no great surprise) finance director Nigel Wilson. In governance circles there is often some discomfort about finance directors stepping up to become CEO but at L&G it makes sense. L&G has had the odd wobble, but in general it has matched or beaten City forecasts while refusing to waste its shareholders' money on expensive and ill thought out acquisitions.

While Mr Wilson will enjoy a chunky pay rise, he is getting less than his predecessor. It's too much, but L&G is more sensible in this regard than most.

The downside is this: L&G has started to expand internationally and met the City's forecasts when it last updated earlier this month, with £7.5bn of gross new business and a 2 per cent rise in cash generation to £249m. But it is still very dependent on the UK, and as the excellent Nic Clarke at Charles Stanley has pointed out, the consumer squeeze does not bode well for savings companies in this country. Britons need cash for food, fuel and clothes right now. Saving can wait.

By contrast to Aviva, L&G is a quality company with an attractive yield of 5.4 per cent.

Income seekers might want to hold for that reason but otherwise I'd be inclined to take some profits.

Suggested Topics
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Harry Redknapp. Mark Hughes and Ryan Shawcross
footballNews and updates as Queens Park Rangers host the Potters
ebooksAn unforgettable anthology of contemporary reportage
New Articles
i100... with this review
Holly's review of Peterborough's Pizza Express quickly went viral on social media
New Articles
Arts and Entertainment
musicHow female vocalists are now writing their own hits
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam