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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