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Aviva - 'Simple and clear cut' results

Nicholas Hyett | 9 March 2017 | A A A
Aviva - 'Simple and clear cut' results

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Aviva plc Ordinary 25p

Sell: 402.60 | Buy: 402.80 | Change 0.00 (0.00%)
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Allowing for one off charges, Aviva's operating profits increased 12% to £3bn in 2016. That supports a 12% increase in the full year dividend per share, with a final dividend of 15.88p per share. The group's Solvency II, regulatory capital position improved to 189% (2015: 180%).

The shares rose 5.9% following the announcement.

Our View

Mark Wilson described this year's Aviva results as "Simple and clear cut". We're inclined to agree. Under Wilson, the business is being transformed into a leaner, more coherent operation, 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 - with a prospective yield of 5% in 2017.

Fringe businesses have been sold or closed, while larger units have been bulked up with the acquisitions of Friends Life and RBC's general insurance unit. The life and general insurance businesses are now generating steady high-to mid-single digit growth.

The slimming process has helped the group generate plenty of capital this year, exceeding its 150-180% Solvency target. News that Aviva is looking to return some of that surplus to shareholders, either through share buybacks or special dividends, is very welcome.

Away from the more established insurance activities, Aviva Investors looks like it is functioning as the group's growth engine at the moment, albeit from a very low base. The flagship 'AIMS' multi-asset fund is going toe-to-toe with Standard Life's 'GARS' and seems to be coming off the better so far. Low capital requirements mean that profits here should drop quickly through the bottom line.

In the medium term the group is looking for digital solutions to tie together its disparate business lines. The MyAviva App allows users to see all their Aviva products in one place. The group is hoping to use its rapidly increasing customer base(users more than doubled this year to 5m) to cross sell its various products as well as increase engagement among its 5m former Friends Life customers.

Overall, these results suggest Mark Wilson has built up a solid set of foundations at Aviva. Steady profit growth and plenty of capital generation mean the group can start funnelling cash back to investors or fund new expansion as management sees fit.

Full Year Results

Life insurance continues to contribute the lion's share of group operating profits, up 8% at £2.6bn this year. However, both of Aviva's other divisions are increasing their contributions, with General and Health insurance growing 9% to £833m and Fund Management profits up 30% to £138m.

Overall cash remittances from business units to group increased 20% to £1.8bn. That included a special £250m remittance from the UK Life business following the integration of Friends Life, with a further £750m expected to be paid by the end of 2018. Aviva has achieved synergies of £270m from the acquisition, beating an initial target of £225m.

Overall, the life insurance business saw the value of new business written rise 13% to £1.4bn, reflecting strong performances in Italy and the UK in particular.

General insurance net written premiums rose 15% to £8.2bn. However, changes in the Ogden rate (used to calculate personal injury insurance claims), meant the division's combined operating ratio (a key measure of underwriting performance) deteriorated significantly, hitting 101.1%. Excluding this effect the combined operating ratio still worsened slightly, to 95.2% (2015: 94.6%).

In Aviva's fund management business, Aviva Investors, the flagship AIMS funds saw assets under management treble to £9bn. The division saw a small net inflow in overall AUM, which now stands at £345bn.

Going forwards the group continues to target mid-single digit in earnings per share (2016: +3%), a cumulative £7bn in cash remittances to group in 2016-18 and an increased dividend pay-out ratio of 50% by 2017 (2016: 46%).

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.