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Aviva - Profits hit record high

Nicholas Hyett, Equity Analyst | 5 March 2020 | A A A
Aviva - Profits hit record high

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Aviva plc Ordinary 25p

Sell: 245.60 | Buy: 245.90 | Change -14.20 (-5.42%)
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Full year operating profits rose 6% to £3.2bn, a record high. That primarily reflects lower losses in the corporate centre and on centrally held investments, with a weaker result in the UK.

The board announced a final dividend of 21.4p per share, taking the full year payment to 30.9p up 3% year-on-year.

The shares rose 4.5% in early trading.

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Our view

CEO Maurice Tulloch has set himself the rather unambitious goal to "run Aviva better". However, with record operating profits this year the results are rather more impressive.

The group has undergone significant streamlining in recent years. 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. A slimmed down Asian operation is firmly focused on Singapore and China.

The slimming process has left Aviva with plenty of capital, a Solvency II ratio of 206% is well ahead of historic targets of 150-180%. Aviva's using the spare cash to reduce debt 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 9.3% that's likely to be steady rather than rapid growth.

Investors should also bear in mind that Aviva, like all Life Insurers, has significant exposure to the wider market and the current coronavirus outbreak has the potential to be very disruptive.

Operationally the group has had particular success in good cost control, but there's good news on the revenue front too. Aviva Investors is attracting new assets, premiums are up in General Insurance - which has also sorted out last year's Canadian debacle - and inflows are rising in the Life and Savings business.

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.

However, if we had a gripe with Aviva it's that the path to growth beyond improved efficiency is unclear, and we're not sure these results put that to rest.

Despite all the restructuring the current set up still feels like a collection of well performing but disparate businesses. Given that, we think the dividend potential remains the main reason to hold the shares.

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Full Year Results

The UK Life business saw operating profits fall 1.6% to £1.9bn. This reflects the inclusion of costs related to the UK digital business in the division, without which profits would have risen 1%. The division reported higher profits from annuities and equity release, as well as further benefits from changes in longevity assumptions. The division continues to attract inflows into its workplace pensions platform.

Aviva Investors operating profits fell 34.7% to £96m, reflecting lower assets under management (AUM) in the group's higher margin products. Overall AUM rose 4.7% to £346bn and 84% of funds beat their benchmarks over 12 months.

Operating profits from General Insurance fell 2.5% to £594m. The incorporation of UK digital costs impacted profitability, but the division benefitted from "significantly improved" profitability in Canada. Premiums increased across all three regions. The division aims to deliver an improved combined operating ratio (a core measure of underwriting ability) next year.

Europe Life operating profits rose 2.5% to £827m. The division saw new business volumes rise 9% to £13.8bn, with good growth in France and Poland. The division benefited from changes to longevity assumptions but continues to struggle with low yields.

Operating profits in the Asia Life business rose 4.9% to £276m. New business volumes grew 22%, with double digit growth in Singapore and China.

Total cash paid by the divisions to Aviva group fell 16.1% to £2.6bn. The group's Solvency II ratio, a key measure of insurers' capital, rose slightly to 206%.

Return on equity during the year rose to 14.3% (2018: 12.5%).

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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 disclosure for more information.