Cash in on the clearer picture at Aviva

After an encouraging set of half-year results the shrewd money is buying shares in insurance giant Aviva.

Insurance companies are complicated beasts with diverse business models. So when Aviva’s incoming chief executive Andrew Moss signalled his brief was to simplify and streamline its business model in 2007 the markets were pleased.

But then the small matter of a credit crunch intervened and Aviva was blown off course as the priority became improving liquidity and de-risking the business and Moss’s plans had to go on the back burner.

The insurer saw its share price fall along with its peers as solvency fears drove market sentiment lower and, despite recovering with the market in last year's equities rally, it was driven lower again earlier this year as debt fears returned to spook the market. As recently as 25 May it was languishing at a12-month low of 294p (see below.)

But after last week’s far better-than-expected set of half-year results to saw the stock rise 7% on the day to 385p, have investors now missed the boat for this recovery story? We don’t think so. More importantly, neither does Barrie Cornes of Panmure Gordon, the analyst with the joint best record of calling this stock right. He is upping his target price and telling investors to buy.

So what went wrong?

Aviva found itself in a slightly worse position than some of its peers when the credit crunch hit as it had a more complicated structure and a perceived lack of transparency - the legacy of a series of mergers through the late 1990s and early 2000s.

When the crunch began in late 2007, sentiment towards the company went downhill as the spotlight shone on its liquidity and exposure to toxic debt. Aviva’s share price was hurt specifically on worries over the state of its commercial property loans book and whether the company had made enough provision for potentially toxic loans.

Another sector-wide issue as debt fears spread was the health of life companies’ corporate bond holdings. At the time less than half of Aviva’s book had top flight 'triple A' status.

A further issue dragging on share price performance was its comparatively greater weighting to European and UK markets than its riva.s, especially Prudential, which had more access to the fast growing Asian markets.

Recent results

Yet Aviva is currently reaping the rewards of much better-than-expected first half results, widely regarded as its best since the onset of the credit crunch three years ago. The company managed to increase its IFRS operating profits by 21% on the same period last year to £1.27 billion, driven by strong growth in its European, UK, and US life divisions.

Net operating capital generated in the same period was £0.9 billion which Aviva said represented strong progress towards its expected £1.5 billion target for the year.