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Aviva - sales growth as coronavirus hits capital

Nicholas Hyett, Equity Analyst | 21 May 2020 | A A A
Aviva - sales growth as coronavirus hits capital

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Aviva plc Ordinary 25p

Sell: 245.60 | Buy: 245.90 | Change -14.20 (-5.42%)
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Aviva reported an increase in both Life and General Insurance sales during the first quarter of the year, up 28% and 3% respectively. The growth was driven by bulk annuity sales in the early part of the quarter and strong growth in the Canadian general insurance business.

The group estimates £160m of additional general insurance claims stemming from the coronavirus outbreak, after accounting for reinsurance. Aviva's investment portfolio continues to perform well, with just 3% of the portfolio seeing its credit rating downgraded by a letter.

The shares were broadly flat following the announcement.

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Our view

If you could put coronavirus to one side, this would have been a fairly upbeat first quarter for Aviva.

Bulk annuities, where Aviva takes on final salary pension schemes for an upfront fee, are boosting Life Insurance sales while the recovery in Canadian premiums together with improved profitability is putting General Insurance on a more even keel. It feels like CEO Maurice Tulloch's rather unambitious goal to "run Aviva better" is in fact delivering results.

Unfortunately though you can't put coronavirus to one side. The fortunes of all life insurers are intimately linked to financial markets and Aviva hasn't escaped unscathed. While the investment portfolio has fared rather well all things considered, falling gilt yields and lower share prices have reduced the group's capital surplus. The group's exposure to business interruption insurance, while limited, is also expected to weigh on general insurance results, reducing the ability to internally generate additional surplus this year.

The good news is that, having undergone significant streamlining in recent years, Aviva was in relatively good shape going into the current crises. 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 had left Aviva with plenty of capital, and although recent market falls have reduced this, a Solvency II ratio of 182% at the end of March was above the historic targets of 150-180%. Aviva was planning to use the spare cash to reduce debt and pay a growing dividend.

Coronavirus has rather scuppered plans on that front, with the group suspending the dividend altogether following pressure from regulators.

Operationally the group has had particular success in good cost control, but recent revenue trends have been promising too. Aviva Investors is attracting new assets, premiums are up in General Insurance 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, if delivered, 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 future growth remains unclear. Despite all the restructuring the current set up still feels like a collection of well performing but disparate businesses. The ups and downs of the market and the economy will continue to batter the group, and could delay the return of the dividend for some time. Given the dividend suspension and relatively healthy capitalisation Aviva looks in pretty good shape to weather the storm, but we find it difficult to be enthusiastic about the long run.

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First Quarter Trading Update

First Quarter new business volumes (PVNBP) rose 28% to £12.3bn in the Life business, driven by bulk annuity sales in the UK. The UK Savings & Retirement business saw inflows increase to £2.3bn, with growth in both workplace and retail savings. European Life sales fell 14% to £3.3bn, with lower 'with profits' sales in France and Italy.

General Insurance net written premiums (NWP) rose 3% to £2.4bn. That reflects 1% growth in the UK (to £1bn) and 8% growth in Canada (to £0.6bn) where the group benefited from higher prices and higher volumes. NWP rose 2% in Europe to £0.7bn.

Aviva expects £200m of claims relating to business interruption insurance, partly offset by favourable developments elsewhere in General Insurance. The net overall impact on general insurance is expected to be in the region of £160m.

The group finished the quarter with a Solvency ratio of 182%, a key measure of insurers capitalisation and around 24 percentage points lower than at the start of the year. This reduction largely reflects movements in capital markets.

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