Unit sales to improve solvency and raise stock price, says Investec’s Kevin Ryan

Flooded sign with sandbag

Flood losses will push Aviva’s first-half 2012 combined ratio to 99.1%, according to forecasts by Investec analyst Kevin Ryan.

The company posted a first-half 2011 combined ratio of 96% and has a target combined ratio of 97%.

Ryan said that he expected Aviva’s year-on-year general insurance result to drop by 5%, “which may prove optimistic given the unusual severity of the UK weather and particularly the very heavy rain experienced in June,” he said in a research note.

He added: “The company currently has a target of 97% and, as a leading UK insurer, we would be surprised if this target was hit given the severity of the weather.”

On a positive note, Ryan expects the sale of non-core divisions, which Aviva is currently engaging in, to improve the insurer’s solvency provision, as measured by the European Commission’s Insurance Groups Directive (IGD).

“As the disposals occur, pressure on IGD solvency should also recede as there will be more available capital which will help to build a buffer against the inherent volatility of holding European Sovereign bonds to back the relevant national businesses.”

He also expects the sales to boost Aviva’s stock price. “We continue to see Aviva as having significant re-rating potential and this will occur, in our view, as the disposal process outlined on the investor day on 5 July unfolds,” Ryan said.