Aviva plc (AV.) Ordinary 25p
HL comment (26 November 2020)
Aviva reported a 13.8% decline in the value of new business (VNB) written by its life insurance business, which stood at £714m in the first nine months of the year. That was partially mitigated by modest 1.4% growth in general insurance net written premiums, which hit £7.1bn.
The group has rebased the dividend, and now expects to pay a full year dividend of 21p per share, down from 30.9p last year. The dividend is then expected to grow by low to mid-single digits over time. Once debt targets are reached the group will also return any surplus capital to shareholders.
This lower level reflects the sale, or planned sales, of non-core businesses outside the UK, Ireland and Canada.
Aviva shares fell 1.4% in early trading.
Newly installed CEO Amanda Blanc intends to focus attention on the UK, Ireland and Canada. Other geographies are likely to find themselves on the chopping block, with disposals set to help bring debt down.
If all this sounds familiar it's because to a large degree it is. Former CEO Mark Wilson was a big believer in focussing the business on the areas where it was strong, while his successor Maurice Tulloch put debt reduction front and centre. Perhaps the familiarity shouldn't be a surprise. Neither really managed to turn Aviva around, and as a result the challenges facing Aviva haven't really moved on.
Unfortunately the additional "transform performance" pillar of Blanc's plan is more of an ambition than a strategy at the moment and we would really prefer some detail on how that's going to be delivered. We hope full year results will be accompanied by a deeper dive into Blanc's strategy for the business.
In the meantime the board have taken the unpopular, but not entirely surprising, decision to rebase the dividend. While the cut is unwelcome news for existing shareholders a dividend yield of around 6.5% (based on a 21p dividend this year) may well tempt new investors - especially at the more affordable lower level.
The cut should free up funds to pay down debt, and may eventually mean special dividends and share buybacks become a normal part of Aviva's shareholder package. That would allow shareholders to benefit from the group's relatively healthy capital position - although we think those kinds of exceptional payments are some way off.
Aviva's ace in the hole strategically is that it's probably ahead of the game in digitisation. So far it's not easy to see the benefits - although it may go some way to explaining the group's relatively resilient lockdown performance. However, in time automating a larger proportion of the client journey should deliver cost savings and could improve cross-selling.
Unfortunately Aviva's fundamental problems remain unchanged. Despite the efforts of successive CEOs, the current set up still feels like a collection of well performing but disparate businesses. The ups and downs of the market and the economy will continue to batter the group. Given a relatively healthy capitalisation Aviva looks in pretty good shape to weather the storm, but we find it difficult to be enthusiastic about the long run.
Third Quarter Trading Update
The core UK, Ireland and Canada businesses saw progress more or less across the board.
VNB in the UK & Ireland life business rose 5% to £203m, largely thanks to £5bn of bulk annuity sales. UK Savings and Retirement flows rose 20% to £6bn - with both the workplace and retail platforms performing well. Aviva investors saw third party inflows of £1.2bn, with new business wins in both the UK and North America.
Net written premiums in UK general insurance remained flat at £3.2bn, as growth in commercial lines offset weakness in personal insurance. Canadian net written premiums rose 3% at constant exchange rates to £2.3bn - mainly thanks to improved pricing in commercial.
In the non-core Continental Europe and Asia businesses VNB fell 19.4% to £411m. That largely reflects lower with-profit volumes in France and Italy. Net written premiums rose 4% in general insurance to £1.3bn, reflecting improved pricing in France.
Controllable costs fell 5% to £2.8bn, and the group remains on track to meet its 2020 and 2022 cost reduction targets.
Aviva has sold its majority shareholding in Aviva Singapore and its Italian business Aviva Vita. Together these transactions raised £2bn. The group has also announced or completed the sale of its Indonesian and Hong Kong businesses. Aviva continues "exploring options across our manage-for-value portfolio, including in France, Poland, the remainder of Italy and [its] joint ventures".
At the end of the quarter Aviva's Solvency II ratio (a key measure of insurance capitalisation) stood at 195%, up from 194% at the half year. Going forwards the group will return any surplus capital over a solvency ratio of 180% to shareholders - although only once a target leverage ratio of less than 30% is achieved.
Aviva key facts
- Price/Book ratio: 0.76
- 10 year average Price/Book ratio: 1.15
- Prospective dividend yield (next 12 months): 7.6%
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.
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 disclosure for more information.
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