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Aviva - Reasonable results, Asia under review

Nicholas Hyett | 8 August 2019 | A A A
Aviva - Reasonable results, Asia under review

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Aviva plc Ordinary 25p

Sell: 402.60 | Buy: 402.80 | Change -1.50 (-0.37%)
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First half operating profits rose 1% to £1.4bn. That was driven by a strong result in general insurance, which more than offset weakness in Fund Management and the lack of longevity reserve releases in Life Insurance.

The interim dividend increased 3% to 9.5p per share.

The shares were broadly flat in early trading.

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Our view

Former CEO Mark Wilson transformed Aviva into a leaner, more coherent operation, with a focus on cash generation and financial strength.

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. It now looks like the remaining Asian businesses will also getting the chop - leaving Aviva as a developed market universal insurer.

The slimming process has helped the group generate plenty of capital, with a Solvency II ratio of 194%, well ahead of its 150-180% target. Aviva's using its spare cash to reduce debt over the coming years and has introduced a progressive dividend policy which should see the dividend rise in the years to come - although given the prospective yield is already 8.5% that's likely to be steady rather than rapid growth.

Away from the more established insurance activities, Aviva Investors is getting a fair bit of attention at the moment, as the group looks to build out a direct investment business. Less welcome is news the division continues to leak assets, although some big wins in the last quarter should stem the flow. The division is a small contributor to group profits at the moment, but low capital requirements mean profits here should drop quickly through to the bottom line.

New man Maurice Tulloch has promised to 're-energise' the group with a focus on insurance fundamentals, customer service, reduced complexity and increasing the pace of change at Aviva. They're all good things - but not noticeably different to the strategy under Mark Wilson. But then Tulloch has been with Aviva for 27 years, so perhaps that's no surprise.

Digitisation remains key to the company's cost cutting ambitions, and should increase cross- selling opportunities too. Meanwhile the ambitious debt reduction targets will reduce interest expenses and increase resilience too - particularly welcome given the increasingly tough economic environment.

Overall, Aviva's got solid foundations. However, with Tulloch promising more of the same, and debt repayments set to soak up plenty of cash over the next couple of years, top line growth looks like it will be taking a back seat. Given that fact, we think the dividend potential remains the main reason to hold the shares.

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Half Year Results

Life Insurance operating profits fell 8% in the first half to £1.3bn. That reflects fewer policies written in the UK and less profitable product mix in France.

Aviva's General Insurance business saw operating profits rise 29% to £391m in the half. That reflects a return to profitability in Canada as well as improvements in Asia and Europe. The group's overall Combined Operating Ratio, a key measure of underwriting performance, improved to 95.9%.

The fund management business, including Aviva Investors saw operating profits fall 18% to £61m. That was driven by disposals completed last year and lower average Assets Under Management (AUM) during the period. External outflows in the period hit £914m.

Total cash paid by the divisions to the Aviva group rose 6% to £1.6bn. Aviva finished the half with a Solvency II regulatory capital position of 194%, 10 percentage points lower than at the end of last year, primarily due to the fall in interest rates.

The board is reviewing 'strategic options' for the group's Asian businesses.

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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.