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Aviva - shareholder returns announced

Nicholas Hyett, Equity Analyst | 12 August 2021 | A A A
Aviva - shareholder returns announced

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Aviva plc Ordinary 25p

Sell: 397.20 | Buy: 397.40 | Change 4.50 (1.15%)
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Aviva reported underlying operating profits of £725m in the first quarter, up 17% year-on-year. That reflects very good results in the general insurance business, both in the UK and Canada, as the group experienced favourable weather and some reduction in claims in motor as customers drove less. That was supported by good cost control in the corporate centre.

Alongside results the group announced plans to return £4bn to shareholders by the end of first half of 2022 - starting immediately with a £750m share buyback and an interim dividend of 7.35p per share, up 5% year-on-year.

Aviva shares rose 2.8% in early trading.

View the latest Aviva share price and how to deal

Our view

Having spent the last few years suffering a bit of an identity crisis Aviva seems to have finally settled down to life as a fairly boring, but highly cash generative, insurance business. Investors are enjoying the fruits of the transition, with bumper shareholder returns.

The group is now firmly focused on its core markets of the UK and Canada. Debt is well below target with a comfortable capital surplus. With plans to increase the dividend slowly going forward, the group has said £4bn of the surplus capital will come back to shareholders over the next 12 months, starting with a £750m share buyback.

We expect any surplus after the capital return to be put to work funding future growth. In particular Aviva's bulk annuity business, where Aviva takes on final salary commitments from pensions funds, has grown rapidly. These contracts feed significant quantities of new assets into the business which can be managed by Aviva Investors - increasing scale and profitability. However each new insurance contract requires underwriting with some of Aviva's own capital, making expansion expensive.

The group is showing some real signs of progress outside annuities too.

Underwriting has improved in the General Insurance business, with premiums and customer numbers holding up well through the pandemic. Meanwhile the defined contribution Workplace pension platform is showing steady growth in assets, supported by the introduction of auto-enrolment. It's a similar story in Aviva's platform for financial advisers, where the group was among the top 3 platforms for adviser flows in the first half.

However, Aviva's ace in the hole strategically is that it's ahead of the game in digitisation. Controllable costs fell 2% in the half, and long term digitisation could improve cross-selling. CEO Amanda Blanc seems to be making headway where her predecessors struggled. In its current format Aviva seems to have a complementary business model, products that resonate with clients and a sense of focus it's lacked in some previous guises. That should serve it well.

Aviva key facts

  • Price/Book ratio: 0.83
  • 10 year average Price/Book ratio: 1.13
  • Prospective dividend yield (next 12 months): 5.7%

All ratios are sourced from Refinitiv. 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

The UK & Ireland Life business reported a 34% decrease in operating profit to £545m. Protection & Health was the only part of the business to grow year-on-year, with a 48% decline in bulk annuity business to £1.6bn. However, on a more positive note the division reported a 12% increase in total new business, driven by a 36% rise in Savings & Retirement sales as both Workplace and Platform businesses delivered a strong set of results with combined net inflows of £5.4bn.

General Insurance reported operating profit of £420m, up 432% year-on-year. That reflects a 6% increase in gross written premiums, together with fewer weather related claims, a reduction in COVID related claims and reduced claims in motor as customers continue to travel less. As a result the division reported a combined operating ratio of 91.6%, and expects that to remain below 94% for the full year.

Asset management business Aviva Investors reported net inflows of £829m in the first half, versus a £574m outflow in the same period last year. That included £1.1bn of external net inflows. Together with good investment results that meant Aviva investors' AUM held for third parties rose 2.8% year-on-year to £74bn.

Underlying cash remittances during the half hit £1.1bn, up from £108m a year ago and on track for the group's target of $5bn in remittances between 0221 and 2023. The significant improvement reflects the volatility last year caused by the pandemic.

Aviva reported a Solvency II ratio, a key measure of insurers capitalisation, of 203%, up from 202% at the start of the year. Capital generation in the period was £578m, down from £890 a year ago.

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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 Refinitiv. 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.