Robust growth in Europe and Asia

The world's fifth largest insurance group, Aviva (AV), recently released first quarter new business results. Although turnover was flat in the UK, we were heartened to observe new business sales of long-term savings (life, pensions and investments) increase 17 percent to £6,134 million. We believe robust growth in continental Europe and Asia holds particular promise as distribution channels are developed along side a strong product offering and improving investor sentiment.

Following our last review in FAT74, AV traded at 690.50p for the first time in almost three years. Subsequent price action has witnessed the shares correct lower, however we believe that the longer term upward trend remains firmly intact. Additional time for the shares to consolidate may be required before upward momentum returns, We believe downside risk is limited by solid support between 590p and 570p.

Aviva, operating as Norwich Union in the UK, is the country's largest insurer. Last quarter, total new sales decreased modestly by £26 million to £2,349 million. The decline was primarily due to lower sales of individual and corporate pensions which were nearly offset by robust growth of annuity and bond sales. Looking ahead, we believe the company's joint venture (JV) with the Royal Bank of Scotland (which produced a modest 3 percent rise in sales) along with new distribution agreements should drive sales growth. Bolstering this sentiment further is Aviva's anticipation of improvement in the UK market this year as investor confidence returns.

Continental Europe contributed a healthy 57 percent of Aviva's total new sales business. Strong results were achieved across the board with the exception of Spain and Poland where legislative changes and investor caution adversely affected performance. However, despite Spain and Poland, sales in Aviva's life and pension business rose by 31 percent to £3,270 million .

Sales in France rose by 40 percent after receiving a huge boost from Credit du Nord Joint Venture (JV) which began last October. In the Benelux area, turnover in long term savings products increased by an impressive 48 percent to £810 million. Again this was driven by a JV, this time with ABN AMRO. Ireland and Italy contributed 32 and 33 percent increases respectively. Ireland experienced robust growth across all product lines while Italy benefited from three local bancassurance partnernerships. Growth in Germany was robust with total sales rising 59 percent following a change in the tax law.

Aviva is rolling out the successful European model with local partners in Asia and this is leading to solid results. In Singapore and Hong Kong, where new business sales have more than doubled, the insurer has teamed up with the banking group DBS. Even better results have been achieved in India and China although these businesses are still quite small. However, the expansion opportunities in Asia hold tremendous potential. We believe the Far East will continue to out-perform Aviva's more traditional markets as India and China continue their development.

We believe the company's strong brands, broad product portfolio, and effective distribution network provide considerable leverage to an improving investment and savings climate. In the long-term we are confident that fast growing markets such as China and India will provide outstanding business development opportunities. A key driver in accessing the full potential of these markets will be the formation of strategic partnerships with local institutions thus providing Aviva with a low risk / high return entry strategy. Given the company's proven track record in this area, we believe the prospects for above average earnings growth is high. In addition, solutions aimed at addressing the growing pension crisis in the UK (such as a government mandated savings scheme) could provide additional domestic support.

On the charts, we believe Aviv's recent fall is nothing more than a temporary correction, within an ongoing bull market. Considering the shares have rallied by as much as 40 percent since last August, the recent volatility is not out of the ordinary. Once the correction is complete, we believe the longer term upward trend will be restored. At current levels we believe Aviva's valuation is undemanding, trading on a prospective price earnings multiple of nearly 10 times and yielding over 4 percent. AV will remain firmly held in the Fat Prophets Portfolio.