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Aviva - Covid-19 hits profits, but dividend back

Nicholas Hyett, Equity Analyst | 6 August 2020 | A A A
Aviva - Covid-19 hits profits, but dividend back

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Aviva plc Ordinary 25p

Sell: 370.90 | Buy: 371.10 | Change -23.10 (-5.86%)
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Aviva reported an operating profit of £1.2bn in the first half of the year, down 11.6% year-on-year. That was driven by a decline in underwriting performance in the General Insurance business, as COVID-19 related claims increased.

The board announced an interim dividend of 6p per share. As part of a strategy update the group will review its dividend policy and update shareholders at full year results.

The shares rose 5.0% in early trading.

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Our view

Aviva was never going to escape the coronavirus outbreak unscathed. The fortunes of all life insurers are intimately linked to financial markets, and the general insurance unit has taken a hit on business interruption and travel insurance.

However, if you can look through the inevitable disruption these numbers are actually reasonably positive. New business has continued to grow, and with operating profits comfortably positive the group's been able to generate significant additional capital. That's driven a quarter-on-quarter improvement in the group's solvency ratio.

An improved capital position has allowed the group to restart the dividend earlier than analysts had expected. However, investors should beware assuming that means its back to business as normal. The 6p dividend is just a fraction of what investors have already missed out on and we suspect an ongoing review of the dividend policy will see future payments trimmed.

With Amanda Blanc recently installed as CEO we suspect full year results will also be accompanied by a deeper dive into her strategy for the business.

We know she intends to focus attention on the UK, Ireland and Canada, with other geographies likely to find themselves on the chopping block. The intention to cut debt reinforces our suspicions that dividends will be lower. However, the "transform performance" pillar is more of an ambition than a strategy and we would really prefer some detail on how that's going to be delivered.

If all this sounds familiar it's because to a large degree it is. Former CEO Mark Wilson was a big believer in focussing the business on the areas where it was strong, while his successor Maurice Tulloch put debt reduction front and centre. It's perhaps not a surprise, because the challenges facing Aviva haven't really moved on.

Aviva's probably ahead of the game in digitisation, but so far it's not easy to see the benefits - although it may go some way to explaining the group's relatively resilient lockdown performance. Automating a larger proportion of the client journey should ultimately deliver cost savings, but we're not yet clear how it can power future growth.

Ultimately Aviva's fundamental problem remains unchanged. Despite the efforts of successive CEOs 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 will likely restrict dividend growth. Given a 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.

Aviva key facts

  • Price/Book ratio: 0.66
  • 5 year average Price/Book ratio: 1.16
  • Prospective yield: 10.7%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Recently appointed CEO, Amanda Blanc, announced a short strategy update alongside results. She intends to 1) focus the portfolio on the UK, Ireland and Canada, withdrawing capital from other markets where appropriate, 2) build on positive customer satisfaction and digitisation in the UK and 3) reduce debt to improve financial strength.

Aviva's UK Life business saw operating profits rise 9% to £817m. That reflects improved new business performance across Annuities & Equity Release, Health & Protection and Savings & Retirement.

Aviva Investors reported an operating profit in the half of £35m, down from £60m a year ago, as markets fell and the group originated fewer private assets. The division reported £1.3bn of external inflows.

Operating profits in General Insurance fell 49.7% to £167m. That reflects a £165m impact from coronavirus related claims, net of reinsurance, in business interruption, other commercial lines and travel insurance. Net written premiums were flat year-on-year, with the divisions combined operating ratio deteriorating by 3 percentage points to 99.8%.

The International Life business saw operating profits fall 6.4% to £367m in Europe and 7.9% to £140m in Asia. That was largely driven by weakness in France and the soon to be disposed of Friends Provident International business.

Aviva's Solvency II ratio stood at 194% at the end of the half, down from 206% this time last year. The Solvency capital surplus now stands at £12bn, with a leverage ratio of 32%.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.