There is an irony that Aviva - whose shares have fallen 30 per cent from last year’s peak amid fears of the fallout from the credit crunch - should actually appear to have benefited from the turmoil in world financial markets.
Yesterday’s 2007 new business figures showed that Britain’s biggest insurer enjoyed a 17 per cent surge in bond sales in the UK in the second half of last year as cautious investors sought secured and low-risk funds.
However, sales were stronger across the board: worldwide new business was up 25 per cent to £38.6 billion, a full £1.2 billion ahead of consensus forecasts. About £540 million of that may have come from a single Dutch pension scheme, but Aviva still bettered expectations in both life and pensions and investments, which rose 22 per cent and 41 per cent, respectively.
Where the forecasting flair of the Norwich Union owner did disappoint was in its estimation of the claims bill from last summer’s flash floods – which, at £475 million, has come in £75 million above its initial reckoning. The effect is that Aviva missed its target of a 98 per cent combined operating ratio - the industry’s profitability measure, which balances claims paid out against premiums received – by two percentage points, meaning that effectively it broke even. However, for a company on track to report pretax profits of about £3 billion this year, that is not especially troubling. Furthermore, flood losses are feeding through to higher premium rates for future years.
Sales in North America – where the group bought AmerUS for £1.6 billion two years ago – rose an impressive 39 per cent, putting Aviva on track to double revenues three years from the acquisition. Sales in Asia, where Aviva is routinely overshadowed by Prudential, were up 60 per cent and account for 11 per cent of the total. Aviva’s Eastern Europe exposure, which differentiates it from its UK peers, is also paying off; Poland was up 53 per cent.
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Andrew Moss, Aviva’s new chief executive, was careful not to raise hopes for what will be a tougher 2008, saying that Aviva expects at least to grow in line with the market. But investors continue to treat Aviva and the wider insurance sector harshly. Friends Provident’s disclosure last week of a rise in charges to cover customers cashing in policies prematurely has done little to aid sentiment. Despite assurances yesterday from Aviva that its US business has no direct exposure to sub-prime losses, the stock market is unlikely to be satisfied until year-end balance sheets are published.
Aviva’s appeal is as a conservatively run, geographically diversified insurer that has expanded overseas – nearly two thirds of sales now come from outside the UK – largely through low-risk joint ventures, rather than big acquisitions. On most estimates it now trades at a discount to embedded value – a conventional measure of an insurer’s worth – which makes it cheaper than at the 2003 trough. If a current-year earnings multiple of 7.1 times is not enticing enough, a prospective yield of 6 per cent should be. Buy at 602½p.
DMGT
Amatter of weeks after a sliding share price – down 44 per cent since May – prompted Daily Mail and General Trust to be ejected from the FTSE 100, yesterday’s better than expected trading statement gave both bulls and bears something to chew on. Advertising revenues at Associated Newspapers, the unit that owns the Daily Mail and the group’s national newspapers, proved respectable, up 4 per cent in the fourth quarter, and again in January. Yet there were signs of a softening at DMGT’s regional titles as property advertising weakened. Advertising revenue here was 1 per cent lower in the fourth quarter, and a little worse in January. That suggests that 2008 is likely to be sticky, but not terrible.
The rest of the business is not dependent on print advertising. There are some healthy online properties – despite problems with the closure of Simply Switch and struggling classfied ads business Loot in which DMGT had invested a little under £20 million – which are helping to support Associated’s growth. The remainder is a mixture of trade shows, professional publications and electronic information businesses – the last of which grew revenues by 18 per cent in the quarter. But a lowly rating of nine times current-year earnings would appear to give DMGT little credit for resilience. Hold on at 481p.
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Thus Group
It may be of little consolation to its long-suffering investors but a depressed share price has worked in favour of Thus. Under the deal struck two years ago through which the business telecoms operator bought Your Communications from United Utilities for £59 million, some £7.3 million of the payment was contingent on its shares sitting between 200p and 270p by the end of last year. But with Thus ending 2007 at 131p – it has since fallen 15 per cent – it has saved itself a paper payout and will be writing off the goodwill from its balance sheet.
The other reassurance from yesterday’s trading update is that the company is on track to report full-year revenues and operating profits of at least £565 million and £56 million respectively, which implies growth of 6 per cent and 31 per cent. That much suggests that, two years after the failure of its audacious bid for Cable & Wireless, a strategy of organic growth supplemented by more manageable acquisitions is paying off. But profitability at the pretax level is still not expected until 2009.
With tougher times likely to prompt customers to review their telecoms and data contracts, the shares, even at 111¼p, fail to inspire. Avoid.