Aviva Continues to Carry High Uncertainty

Aviva reported a strong first half but should still only be considered as an investment with a large margin of safety

Jim Ryan 6 August, 2010 | 9:33AM
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Aviva announced first-half profits that doubled on a year-over-year basis, largely due to gains in its investment portfolio. As a result, book equity attributable to common shareholders increased by 14% and 7% from the first half of last year and the end of last year, respectively. Yet because most of the profits came from improving financial markets as opposed to insurance operations, we will stick with our 430p fair value estimate for these shares.

Premium growth improved 5% over last year during the first half, slightly better than expected, but not enough to change our estimates. The problem is that Aviva's common equity to investments remains slim, at about 11%. Another round of financial market upheaval could have a detrimental effect on shareholders, possibly resulting in the need for a capital raise. What's more, debt exceeds equity, which could limit the firm's ability to borrow in an emergency. In our view, Aviva carries very high uncertainty, and should only be considered as an investment with a large margin of safety.

Jim Ryan is an equity analyst with Morningstar.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aviva PLC465.40 GBX-1.13Rating

About Author

Jim Ryan  Jim Ryan is a senior analyst with Morningstar.

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