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Aviva - on-track to meet upgraded targets

Aviva - on-track to meet upgraded targets

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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 Shares 32 17/19 pence

Sell: 410.90 | Buy: 411.10 | Change -0.50 (-0.12%)
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Total Life sales increased 1% to £8.7bn in the first quarter. That reflects growth across Annuities & Equity Release, Protection & Health, and Ireland Life, which offset weakness in Wealth & Other. The value of new business (VNB) rose 7%.

Total gross written premiums rose 5% to £2.1bn, driven by the UK and Canada.

Aviva is on track to meet its upgraded targets laid out in March, and dividend guidance of c.£870m for 2022 and c.£915m for 2023 remains unchanged.

The shares were unmoved following the announcement.

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 has 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 outdone its own target of returning "at least £4bn" to shareholders.

The level of shareholder return has surprised us. And while a welcome boost for investors, we'd like to see surplus capital being funnelled to the business on perhaps a wider scale. In particular Aviva's bulk annuity business, where Aviva takes on final salary commitments from pension 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 has shown steady growth in assets, supported by the introduction of auto-enrolment.

Being a huge workplace pensions provider is behind the logic to increase its presence in the wealth management market, through the £385m acquisition of Succession Wealth.

However, Aviva's ace in the hole strategically is that it's ahead of the game in digitisation. Controllable costs are falling, and long term digitisation could help 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 although of course there are no guarantees.

Aviva key facts

  • Forward price/earnings ratio: 7.0
  • Ten year average forward price/earnings ratio: 6.2
  • Prospective dividend yield (next 12 months): 9.4%

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.

First Quarter Trading Statement

UK & Ireland Life saw VNB (value of new business) rise 31% to £144m. A big driver of this was a 22% increase in annuity and equity release sales. This core division was also helped by a 10% increase in sales for Group Protection and Health sales, with Health the standout performer - aided by a good response to the expert Select proposition.

There was a weaker performance in the Wealth business, where market volatility affected investment activity. Sales fell 3%. There was a net inflow of £2.7bn, but this was 6% lower than last year. At the Aviva Investors business, there was a net outflow of £4.3bn, a large proportion of which was expected.

VNB rose 40% in the Ireland Life business - reflecting continued focus on financial discipline.

Across the General Insurance business, Aviva said "In line with the market, we are observing increasing claims inflation across our GI businesses as a result of macro-economic uncertainties and volatility. In response we have taken swift pricing, underwriting and claims management actions to mitigate this, and we expect these actions to continue".

The Solvency II ratio, a key measure of insurers' capitalisation, fell to 205% from 244%. That reflects the £3.75bn capital return.

The total capital return to shareholders of £4.75bn will be complete by the end May 2022.

One of HL plc's Independent Non-Executive Directors is also a Non-Executive Director of Aviva plc.

Find out more about Aviva shares including how to invest

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.