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Aviva - Getting the basics right

Nicholas Hyett | 3 August 2017 | A A A
Aviva - Getting the basics right

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Aviva plc Ordinary 25p

Sell: 397.20 | Buy: 397.40 | Change 0.00 (0.00%)
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First half operating profits of £1.5bn at Aviva represent growth of 11% on last year, with strong performances from General Insurance and Aviva Investors. The group has increased the interim dividend by 13% to 8.4p.

The shares were broadly flat following the announcement.

Our View

Under Mark Wilson, Aviva has been 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 5.2% in 2018.

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 growth.

The slimming process has helped the group generate plenty of capital, with a Solvency II ratio of 193% exceeding its 150-180% target. Aviva is returning some of that surplus through a share buyback, but there's still plenty of firepower for more bolt on acquisitions should management find the right opportunity.

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 to 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 rose 28% in the last 6 months to 6 million) to cross sell its various products as well as increase engagement among its 4 million Friends Life customers.

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. The only question is whether growth with will be steady and organic, or if Mr Wilson has something more ambitious in mind.

Half Year Results

Aviva's improved operating profit reflects better performance across all three major divisions. Expenses increased proportionally, despite a 20% increase in losses from the corporate centre, leaving the group's operating expense ratio broadly flat.

Life Insurance operating profits rose 8% to £1.3bn, as the UK saw double digit growth across long-term savings, protection and annuities & equity release. The group's international businesses benefited from currency movements, but also saw an improved performance from Poland, France and the Chinese joint venture.

General Insurance and Health saw operating profits jump 25% to £417m thanks to a combination of increased net written premiums and an improved combined operating ratio (a key measure of underwriting performance) which now stands at 94.5%.

Asset management business Aviva Investors increased operating profits by 45% to £71m. That reflects increased assets under management, up 1.7% to £351bn, income from asset origination and the continued success of the AIMS fund range, where AUM now stands at £12bn (FY16: £9bn).

The group's Solvency II ratio (a regulatory measure of insurer capitalisation) stood at 193% at the end of the half, with a surplus of £11.4bn. By the end of July Aviva had completed £100m of the £300m share buyback it announced in May.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.