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Aviva - strong financial position supports dividend growth

Aviva saw operating profits increase by 14% over the first half, to £829m.

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Aviva saw operating profits increase by 14% over the first half, to £829m. That was driven by higher profit in UK & Ireland Life offsetting declines from General Insurance, Canada and Aviva Investors.

The interim dividend was hiked by 40% to 10.3p, and the group indicated that it intends to launch a share buyback programme with its 2022 results, which we expect to be released in March next year. Yields are variable and not guaranteed and are not a reliable indicator of future income.

By mid-morning the shares were up 9.2% 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 have so far enjoyed the fruits of the transition, with bumper shareholder payouts.

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 and the intention to start repurchasing shares in 2023.

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

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.

Half Year results to June 2022

At the group level, controllable costs came down by 2% to £1.3bn, these reflect costs associated with maintaining the business. That prompted Aviva to upgrade its cost reduction target to reach £750m (not adjusted for inflation) by 2024.

UK & Ireland Life, the biggest contributor to profits, saw operating profit increase 19% to £651m. Higher profits in Annuities & Equity Release and Heritage offset declines in Wealth and Protection & Health. The value of new business (VNB), an important measure of profitability of new business, rose 13% to £300m

General Insurance posted a £45m fall in operating profits to £375m. This reduction was attributed to the return of normalised post-lockdown claim levels, which was to be expected as driving, travelling and asset usage increased by individuals and organisations.

Aviva Investors saw operating profits fall by £5m to £14m, but much of this was driven by the one-off impact of cost reduction measures and strategic investments.

International Investments, made up by Aviva's joint ventures and associates in Asia, reported a flat £55m contribution to operating profits. However, the value of new business decreased by 23% to £46m reflecting stringent lockdowns in China, and a strong comparative performance last year in Singapore.

Beyond the upgraded guidance on cost savings, Aviva also reiterated guidance of over £5.4bn in cumulative cash remittances to be received between 2022 and 2024. Although nothing has been confirmed as yet.

Aviva reported an underlying Solvency II ratio, a key measure of insurers capitalisation, of 234%.

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: 10th August 2022