Aviva plc (AV.) Ordinary 25p
HL comment (4 March 2021)
Aviva reported a full year underlying operating profit of £3.2bn, broadly in line with last year. The group's Core businesses (the UK, Ireland and Canada) saw operating profits fall 2.6% to £2.5bn as the pandemic hit profits in the UK & Ireland and Aviva Investors.
Alongside results the group announced the sale of Aviva Italy for €873m, building on the previously announced sale of Aviva France for €3.2bn. Together these two deals are expected to significantly boost both the group's liquidity and capital positions, adding around £3bn of excess capital and £3.9bn to cash on hand.
The group announced a final dividend of 14p per share, taking the full year total to 21p, (2019: 15.5p). Aviva aims to grow the dividend by a low to mid-single digit percentage going forwards.
Aviva shares rose 3.1% in early trading.
Aviva had a relatively successful 2020. Operating profits for the full year were well ahead of market expectations, and it's also made significant headway on its restructuring.
The planned sale of the French and Italian businesses will leave the group below its target on debt and well above its target on capital. With plans to increase the dividend slowly, that leaves some questions about what the group plans to do with all the extra capital.
We wouldn't rule out share buybacks, especially as the prospective dividend is already pretty chunky at 6.1%. However, a better use of the capital might be to fund future growth
In particular Aviva's bulk annuity business, where Aviva takes on final salary commitments from pensions funds, has grown rapidly with sales of £6bn in 2020 up 48% year-on-year. These contracts see significant quantities of new assets into the business which can be managed by Aviva Investors - increasing scale and profitability in a less capital intensive part of the business. However each new insurance contract requires underwriting with some of Aviva's own capital, making expansion expensive.
There are signs of improvement elsewhere in eth business too.
Underwriting had improved in the General Insurance business, with premiums and customer numbers holding up well through the pandemic. Meanwhile the defined contribution Workplace pension platform is showing steady growth in assets, supported by the introduction of auto-enrolment. It's a similar story in Aviva's platform for financial advisers, where the group now has a 14% share of market wide adviser flows.
However, Aviva's ace in the hole strategically is that it's 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. In time automating a larger proportion of the client journey should deliver cost savings and could improve cross-selling.
Overall we think 2020 has been a year of significant progress a Aviva, and recently installed CEO Amanda Blanc seems to be making headway where her predecessors struggled. With much of the strategic reshuffle now nearing completion the focus turns to improving performance in the core businesses. In what has been a tough year for the market in general, early signs look promising.
Aviva key facts
- Price/Book ratio: 0.89
- 10 year average Price/Book ratio: 1.14
- Prospective dividend yield (next 12 months): 6.1%
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.
Full Year Results
The UK & Ireland reported an operating profit of £1.9bn, down 3% year-on-year. Strong performance in bulk annuities and Workplace savings, were offset by weaker equity release and individual annuity sales.
In General Insurance Aviva saw operating profits rise 3% to £500m. That reflects an 0.9 percentage point improvement in the group's combined operating ratio, which is the percentage of premiums paid out in claims and costs, to 96.8%. Total net written premiums across the UK, Ireland and Canada were flat at £7.7bn. That reflects strong growth in commercial lines, which more than offset weakness in personal insurance as partner bank and broker branches were shut.
Aviva Investors saw operating profits fall 11% to £85m. That was despite a £1.7bn of net inflows during the year and reflects reduced revenue from stock lending and a reduction in origination fees for alternative investments.
Aviva's Manage-for-Value non-core markets reported operating profits of £1.3bn, up 14% year-on-year. The division includes the to be sold Italian and French businesses, and also saw sales of businesses in Singapore, Indonesia and Hong Kong during the year.
During the year the operating companies made cash remittances to the central group of £1.5bn, down from £2.6bn a year ago. Cash remitted from core businesses fell 29% to £1.4bn.
The insurer reported a Solvency II ratio, a key measure of insurance capitalisation, to 202%, down from 206% a year ago. That's significantly better than the group's 180% target, reflecting an estimated surplus of £13.0bn. However, debt leverage remains marginally higher than the group's 30% target.
Aviva is targeting total cash remittances of £5bn over the 2021-2023 period, with £1.8bn expected for 2023.
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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