Aviva: A British Bet

09/15/2016 10:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

The depreciated British pound has made many British companies, particularly those with US-traded ADRs, more attractive, notes Ian Wyatt, editor of High Yield Wealth

Aviva Plc (AV) is a stand out in this regard. The name is likely unfamiliar to US investors. Aviva is one of the Britain’s largest insurers.

Aviva doesn’t operate in the United States; roughly 56% of Aviva’s operating earnings are generated in the UK. France is the second-largest generator at 14%, followed by Canada, Asia, Poland, and Italy. 

Aviva offers an array of insurance and financial products, but life insurance is the horse that pulls the cart.

The good news is that life insurance operating income is up 20% year over year. Total operating income is up 13%. The value of new business has grown at 14.2% average annual rate over the past four years.

We’re all for growth — as long as it is done intelligently and safely. We think that’s the case with Aviva. We proffer this opinion because Aviva invests its premium income primarily in debt securities.

It owns roughly $63 billion dollars' worth.  Roughly 75% of these securities are rated “A” or higher by the major rating agencies. As for Aviva’s own debt, it’s rated “A” or higher by the major rating agencies. 

In EU and UK markets, the solvency II coverage ratio is the key measure of capital and safety for insurance companies.

One hundred percent is the minimum goal, 150% is considered good. Aviva sports a solvency II coverage ratio of 180%. 

In short, Aviva is a growing insurance company with a rock-solid capital structure, though few investors seem to notice.

The depressed ADR price coupled with Aviva’s 5% dividend and a commitment to grow the dividend offers an enticing value proposition, in our opinion.

The likelihood of the pound appreciating vis-à-vis the dollar further enhances that proposition. We think Aviva has limited downside and plenty of upside potential.

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