Insurance giant Aviva bids to reduce costs

The insurance industry, like much of the financial services sector, has been through a year of upheaval – and Aviva is no exception.

Aviva

400.3p+21

Questor says Hold

Just a year ago, as turmoil engulfed American giant AIG, there were concerns about the solvency of European insurers, including the blue-chip British group, prompting Aviva’s management to assure the market that it had not sought financial aid from British or US authorities.

The company has since embarked upon a series of changes to fortify its balance sheet, improve its geographic diversification by bolstering its US profile and reduce costs at home.

In April, it said 1,100 staff would go this year and four months later announced it would slash its interim dividend by almost a third – its first dividend cut in seven years.

Last month it launched a secondary listing on Wall Street, sold its Australian life assurance and wealth management business for £450m and this week floated

in Amsterdam a 42pc stake of Dutch subsidiary Delta Lloyd for gross proceeds of £1.03bn.

Aviva’s interim statement showed that management has succeeded in bolstering the group’s balance sheet. At the end of September – before the recent sales – it had a surplus to European regulatory requirements of £3.7bn, up from £3.2bn at the end of June.

At the same time, the group’s net asset value per share under the conservative International Financial Reporting Standards stood at 409p, against 349p at the end of June, in part thanks to the strong improvement in financial markets in recent months.

The figures weren’t all upbeat, however – management’s focus on financial strength appears to have come at the expense of sales. While it maintained – and in some cases lifted – margins, total life assurance and pension product sales, along with sales of long-term savings products, fell 11pc year-on-year in the nine months to September. This was a larger fall than analysts were expecting.

The declines are arguably a reasonable trade-off for the company’s more robust financial position, and Aviva, trading at 7.8 times forecast earnings this year, with a dividend yield of 5.8pc, appears undervalued compared to its main rivals – even after yesterday’s rally – so investors needn’t look for the door.

While the group is clearly in its most resilient position in more than a year, the issue for Aviva

is how it intends to capitalise

on its stronger balance sheet. Management yesterday indicated that it is open to the prospect of acquisitions – but with its sales slipping and ongoing speculation that equity markets may have bounced back too far and too fast, investors would be right to question whether reducing debt is a better course of action.

While the extra flexibility that the cash from assets sales has provided is clearly a plus, further clarity on strategy for the proceeds would be equally welcome.

Logica

121.7p +6.6

Questor says Buy

Logica has warned that the "boom years" of the dotcom bubble will never come back. Technology companies, including Logica, raked in bucketloads of cash in the late Nineties and turn of the century as companies spent on dealing with the Millennium Bug, the switch-over to the euro and the seemingly unending rise of the internet. Tech companies were happily targeting double-digit operating margins.

"I don't believe we will ever get back to those margins," Seamus Keating, finance director, said. "It was an unreal time for the sector, as there was huge demand and a shortage of supply."

The industry has been structurally changed to one that supports companies that have already adapted, rather than help them undertake the massive changes of yesteryear.

Mr Keating said Logica is now targeting a margin of 7.5pc, and does not expect a significant upgrade in the medium term.

The recession has exacerbated the slowdown in IT services, but Logica took its medicine in terms of job cuts and restructuring early. The group has cut 1,900, mostly European, jobs since April 2008 while taking on about 1,000 in cheaper locations.

It continued to show its dynamism yesterday with plans to cut costs in under-performing areas by a further £15m by 2010.

Logica, which downgraded its forecasts slightly in the summer, reported third-quarter revenues 2pc higher at £862m.

Encouragingly, Mr Keating said Logica's forward order book was very strong and the company only needs to win "a few percentage points of business" to meet its full-year target.

Naturally, as companies seek to cut costs, Logica's outsourcing business is the bright spot, with the UK putting in the best regional performance due to a string of public sector contracts, including a £75m deal to run the National Policing Improvement Agency.

However, as appears to always be the case with Logica, there are areas of under-performance, including the Benelux region, which reported a 23pc drop in sales.

Overall, Questor expects Logica to make slow and steady progress. But any gains will be dependent on the wider economic recovery and, importantly, on sustained public spending, which could feel the squeeze in an election year.

The shares, trading on 10.4 times earnings and with a 2.6pc yield, look good value at 121.7p. Investors could expect an immediate fillip today as French rival Capgemini is likely to boost the sector by reporting better-than-expected results, but you may have to wait it out a bit for significant gains.