Aviva (AV) Shares Fall by 4%, as Company Faces Legal Action

During the Friday trading session on the London stock exchange, the Aviva stock slumped by 4%, with the current market price at 251.6p.

One of the possible reasons for those recent moves might be the recent announcement from the Hospitality Insurance Group Action (HIGA). The organization’s representatives stated that they were going to take legal action against Aviva and QBE, two of the largest insurers in the United Kingdom.

According to Morning Advisor, the recent survey revealed that 2/3 of insurance claims by pub owners have been rejected. Due to lockdowns, imposed after the outbreak of COVID-19 pandemic, businesses in this sector faced some serious losses. Consequently, many pub owners hoped that their insurer’s payouts could help their companies to survive this economic downturn.

Unfortunately, many of them were in for a nasty surprise as they failed to get those compensations. Quite recently, Aviva’s representative mentioned with Financial Times, that the standard terms and conditions do not cover those cases, which were connected to the outbreak of COVID-19 Pandemic.

Now, this sort of response and the upcoming court cases can be very damaging not only for the company’s financial performance but also to the firm’s reputation as well. The business model of the insurance business is closely based on confidence. If individuals and companies start to doubt the reliability of Aviva’s policies, then this can have a very negative effect on their revenue.

The firm can also lose some of its clients. Clearly, it is highly likely that those disappointed business owners most likely won’t renew their policies with Aviva, once the terms of these agreements expire.

There are also short term issues as well. The firm now will face higher legal costs. Also, in case if the company loses those cases, it will have to pay millions of Pounds to its clients. Even if Aviva’s lawyers somehow manage to win, it will still be damaging to the firm’s future sales, because of all bad publicity.

Aviva’s Share Price Performance

 source: cnbc.com

Aviva’s shares mostly moved sideways during 2019. In February 2020, the stock was trading just above the 400p level. Obviously any type of economic downturn, coupled with a pandemic outbreak, typically leads to rising insurance claims. As a result, the firm’s shares lost around 1/3 of their value and currently trade close to 250p mark.

According to the latest data, the earnings per share indicator of the company stands at 63.1p. Consequently, the price to earnings ratio is near 4.0. This suggests that on a P/E basis, the stock can be very undervalued. The obvious problem for some investors is that Aviva suspended its dividend payments. The recent statement for the firm mentioned that the board will revisit the issue by the end of the year.

Back in 2019, the firm’s total annual payment to shareholders reached 30.25p. So, if the company were to reinstate those payouts, then the dividend yield will be 12%. However, considering recent economic and legal challenges, it is highly unlikely. Consequently, Aviva’s shares might not be the best choice for income investors.