Aviva’s history is one of stitching together various insurers, which once gave it the unlovely name of CGNU. That was changed in 2002 to the made-up palindrome based on the Latin word for living.
The insurer, which has life and general insurance operations in Britain, Europe and Canada, has made healthy progress in the past few years. Mark Wilson, its New Zealand-born chief executive who has had a globe-trotting career, has succeeded in getting rid of poorly performing businesses, bringing its footprint down from 32 countries to 14. He also has strengthened Aviva’s capital and breathed life back into its profits.
The more confident Aviva bought Friends Life in 2015 in a £5.6 billion deal that was the largest UK insurance acquisition in more than a decade, bringing advantages of cost savings, capital benefits and millions more customers.
So Mr Wilson should have been coasting when in March he said that Aviva was awash with £2 billion of excess capital. It was, he said, an “embarrassment of riches”. Instead, the announcement simply turned out to be embarrassing. A plan to buy back £450 million of expensive preference shares at par ended in a bust-up with Aviva’s City peers, prompting the company to back down. Yesterday, Aviva sought to mend more fences ahead of an annual shareholder meeting on May 10, pledging to pay about £14 million to investors who had sold their prefs in a panic. At about the same time, it emerged that Mr Wilson was taking up a seat on the board of Blackrock, the American fund management giant, prompting criticism that he was joining a competitor.
Both developments looked out of keeping with Aviva’s recent sure-footed progress. In truth, Blackrock’s competition with Aviva is limited and Mr Wilson probably gets insights and access from the role that could benefit Aviva. It does, however, indicate that there could be a leadership change in the not-too-distant future, as Mr Wilson casts his net further afield than the UK.
Aviva’s underlying business is solid. At its last set of results the FTSE 100 insurer experienced broad-based growth, with six of its eight key markets delivering double-digit profit improvement.
Yet there are question marks over Aviva. Some in the City were shaken by the Friends deal, which came out of the blue and prompted some shareholders to sell their holdings. Aviva has said it may spend £600 million of its spare cash on deals, indicating that they will be small, but there is a view that it could embark on something big and risky.
Aviva struggles with being caught between some other plays in the insurance sector. Investors gravitate to Prudential for its Asian growth, or Legal & General as a high-yielding play in the life sector. Aviva, which offers a mix of life and general insurance, can be overlooked. That is reflected in its valuation. The shares jumped after Mr Wilson took the reins, but for the past three years they have drifted sideways, despite the fact that profits and dividends have increased significantly.
Barrie Cornes, an analyst at Panmure Gordon, said yesterday: “The shares are now yielding 5.6 per cent this year increasing to 6.4 per cent next, whilst trading on price earnings multiples of only nine times this year and 8.2 times next year.” That, he added, was “too cheap”.
Mr Wilson has pledged a £500 million return to shareholders. In the longer term, Aviva’s structure has been simplified so that if anyone wanted to break it up, they could. That could make it a tasty target.
ADVICE Buy
WHY There may be a management shake-up coming, but the business is sound. A European insurance M&A could drive up its value.
Interserve
Given the volatility in the share price of Interserve in the past six months, it would come as no surprise to learn that the company has won a derogation from regulators for having to comment every time its stock swings wildly.
Listed companies typically are expected to provide an explanation if their stock price moves by more than 10 per cent in a session. Interserve shares, however, have leapt or dived on average about once a week, bouncing between 55p and 110p.
Interserve finally published its 2017 accounts yesterday, the last possible day under the City’s rules. They were delayed by its latest rescue refinancing, giving it £834 million of borrowing facilities against an expected net debt this year of up to £680 million, far more than ten times expected annual earnings.
If the newish management thought that taking nearly £300 million of write-offs, provisions for lossmaking contracts, redundancy costs, losses on property disposals and a bill from its advisers of £39 million, would be a drawing of a line in the mudbath it finds itself in, then the market had different ideas. The stock closed down 12 per cent off 13p at 93¾p. The reason is that Interserve shares — like its debt — are in the hands of speculators, hedge funds and short-sellers; the company has become a plaything of the casino that is called the City.
If that were not enough to put you off a cogent investment appraisal of the company, then a look around its sector should.
Carillion, Interserve’s nearest peer in the construction and public services model, is bust. Companies such as Serco and Mitie, which also do the dirty and dull end of outsourcing, remain in multi-year slumps. Shares in Capita, the best-in-class contractor in the sector, have cratered and it is going through a £700 million emergency rights issue.
Interserve’s new management may be able to turn this company around, but even in their best scenarios it is a three-year project. In the meantime who knows where the sector will be, especially as both sides of the House of Commons are now talking about insourcing, bringing all these outsourced contracts back in-house.
ADVICE Avoid
WHY In a volatile stock there is money to be made daily
