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Aviva - confident on outlook, expects to beat medium-term targets

Aviva reported an 8% rise in first-half operating profit to £715m, driven by General Insurance performance in UK & Ireland and Canada, where gross...

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Aviva reported an 8% rise in first-half operating profit to £715m, driven by General Insurance performance in UK & Ireland and Canada, where gross written premiums rose 12%. Insurance, Wealth & Retirement was a drag, as higher profit in Annuities & Equity Release and Protection & Health were more than offset by higher costs and declines from Wealth.

The stock of future profits, a new measure that reflects profits expected to be released over the life of insurance contracts, rose 1% since the start of the year to £7.9bn.

The solvency II ratio, which measures capital levels compared to requirements, dipped from 212% to 202%. The total interim dividend was raised 8% to 11.1p.

Operating profit is expected to rise 5-7% this year, with cash and capital generation expected to exceed medium-term targets.

The shares rose 2.5% in early trading.

View the latest Aviva share price and how to deal

Our view

This was a pretty upbeat set of half-year results for Aviva. Operating profit came in a little ahead of expectations, costs are in check and the outlook for the medium-term looks promising.

Investors have been well rewarded from the ongoing transformation at Aviva, and the £300m buyback announced alongside full-year results was completed over the half. It was good news as well, to hear management reiterate the full-year dividend plans, backed by a strong capital position. Although no returns are guaranteed.

Aviva brings insurance, wealth, and retirement under one roof. The insurance arm centres around the UK and Canada. The latter has been a standout and now claims the number two spot in its market. General insurance in the UK & Ireland is seeing more challenging conditions. New premiums are coming in, which is positive, but higher claims and costs continue to put pressure on underwriting profit.

Aviva's bulk annuity business, where Aviva takes on final salary commitments from pension funds, has grown rapidly. The market's hot and £2.4bn has been brought in over the year to date, as it snapped up £900m from Thomas Cook recently - the focus continues to be on finding the right new business rather than pushing for market share. These contracts feed significant quantities of new assets into the business, which Aviva Investors can manage - increasing scale and profitability.

There was a small uptick in the stock of future profit, a new metric following new accounting rules. It's important to see that number keep ticking higher, as it represents potential future profit from insurance contracts.

Being a huge workplace pension provider is behind the logic to increase its presence in the wealth management market through the £385m acquisition of Succession Wealth in August 2022. There are also plans to expand the advisory offering to help achieve the goal of at least 10% growth in net flows to wealth. With a longer-term eye, things are moving in a good direction. But it's a challenging and crowded market, not helped by continued market volatility.

However, Aviva's ace in the hole strategically is that it's ahead of the game in digitisation. Controllable costs are in check despite 7% cost inflation, and long-term digitisation could help improve cross-selling. We like the direction of travel and see the 9.3% yield as worthy of a look while the sector remains a little out of favour. Of course, there are no guarantees.

Aviva key facts

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.

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

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 16th August 2023