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Aviva - pledges to regular shareholder returns as premiums rise

Total life sales over the first 9 months dropped 2% to £25.8bn. The value of new business (VNB) rose 37% to £530m, driven by...

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Total life sales over the first 9 months dropped 2% to £25.8bn. The value of new business (VNB) rose 37% to £530m, driven by UK & Ireland Life where VNB rose almost 9 times in Annuities & Equity Release.

In General Insurance, total gross written premiums rose 7%, ignoring the effect of exchange rates, to £7.2bn as both the UK and Canada delivered high single digit growth. The combined operating ratio, which compares claims, costs and expenses to premiums, rose from 92.4% to 94.3%. A higher ratio implies higher costs compared to premiums.

Aviva's on track to deliver savings target of £750m by the end of 2024, compared to a 2018 base level.

Solvency II shareholder cover, a key measure of balance sheet health, sits at 223% and remains well ahead of the group's target. As a result, a new share buyback is expected to be announced alongside full year results. Dividend guidance of c.£870m for 2022 and c.£915m for 2023 remains unchanged.

The shares fell 1.6% following the announcement.

View the latest Aviva share price and how to deal

Our view

Third quarter trading wasn't quite as strong as the first half of the year, but nevertheless demonstrates the resilience of the business model. 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 have so far enjoyed the fruits of the transition, with bumper shareholder pay-outs.

The group's now firmly focused on its core markets of the UK and Canada. Aviva is running a comfortable capital surplus ahead of its own target, with plans to increase the dividend slowly going forward and the intention to start repurchasing shares in 2023.

The level of shareholder return has surprised us - but like the dividend it should be remembered there are no guarantees of future returns. While that's been a welcome boost for investors, we'd like to see surplus capital being funnelled to the business on perhaps a wider scale. 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 has shown some real signs of progress outside annuities too.

Underwriting has improved in the General Insurance business, with premiums and customer numbers holding up well. 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

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
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: 9th November 2022