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
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The Independent Online


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.