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Aviva - Consistent growth despite challenging conditions

Nicholas Hyett | 4 August 2016 | A A A
Aviva - Consistent growth despite challenging conditions

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Aviva plc Ordinary 25p

Sell: 408.25 | Buy: 408.25 | Change 0.00 (0.00%)
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Aviva has announced a 13% increase in operating profits for the first half, to £1,325m, with the interim dividend up 10% to 7.42p per share. Operating EPS rose 1% to 22.4p. The shares were up almost 5% in early morning trading.

Operating profits in the Life business increased 20% to £1,226m, boosted by a 3 month contribution from Friends Life. The Value of New Business (VNB) was up 7% to £583m - including positive performances form the UK, Italy and Spain. Assets Under Management (AUM) on the UK Life platform rose 23% to £10.3bn.

General insurance and health saw profits fall 21% to £334m following increased costs attributed to the Flood Re levy and weather and natural catastrophe claims, following fires in Canada and floods in France. Net written premiums increased 7% to £3,991m. The Group combined operating ratio deteriorated, increasing 3.1 percentage points to 96.2%.

Fund Management operating profits were up £48% to £49m, with Aviva Investors more than doubling its VNB contribution to £13m. The result follows the transfer of £45.1bn of Friends Life assets to Aviva investors in 2015 and further £1.5bn of assets in H116.

The group achieved run-rate synergies from the Friends Life acquisition of £201m by the end of the half, up from £168m at FY15. The group continues to expect to deliver the £225m synergy target by the end of 2016. Operating expenses excluding integration costs increased 13%, mainly as a result of an additional quarter from Friends Life, new government levies and foreign exchange. The overall operating expense ratio increased 0.6 percentage points to 53.4%.

The group remains well capitalised with a Solvency II ratio of 174% (FY15: 180%) and surplus Solvency II capital of £9.5bn. Despite entering the period of macro, political and market uncertainty the group remains confident in its capital position.

Registrations on the MyAviva app have passed 3m (FY15: 2.3m). The group expects to have all UK customer data on a single database by the end of 2016 allowing customers to view all policies in one place.

Our view:

Under Mark Wilson, Aviva is being transformed into a leaner, more coherent business, with a focus on cash generation and financial strength. Shareholders are being compensated for the pain suffered in the past by a rapid rebuilding of the dividend.

The stock took a tumble following the referendum result and now trades on 8x prospective earnings and the prospective yield is 6%, rising to 7.2% by FY18, on current analyst forecasts. However, the group moved quickly to play down capital concerns, something it has repeated today.

Mark Wilson's background might suggest an imminent Asian expansion drive, given his time at AIG's Asian unit, but the evidence so far is that he is first determined to fix the businesses closer to home. That makes sense; a strongly performing European composite insurer with good cash generation can one day fund a lot of growth further afield, if that is where the Board decide to go in years to come.

For now, shareholders can feel the benefit of having a simpler group, with fewer, but larger operating units and product strategies that merge with consumers' increasing desire to transact financial services digitally. If we had a complaint about Aviva, it is that the brand still, we suspect, means nothing to anybody. Advertising strategies seem to have changed faster than the fortunes of the English rugby team over the last few years. But a lot is changing under Mark Wilson, digital initiatives, such as the Aviva Drive app, are moving front and centre and an improved balance sheet offers opportunities. We will watch Mark Wilson's next move with interest.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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