Aviva comes up short on operating profits but pledges to return up to GBP4bn by the end of 2022


Aviva PLC (LSE:AV.) (LSE:AV.) has hailed its best performance in general insurance in a decade and flagged the proposed capital return of at least GBP4bn by the end of 2022.

The capital return will start with a share repurchase programme of up to GBP750mln, beginning immediately. Details on the rest of the cash return pledge will be unveiled in the group’s full-year results.

The insurance giant saw gross written premiums in the first half of the year decline to GBP8.26bn from GBP9.4bn in the first half of last year.

Aviva said it was the best start to the year in a decade for General Insurance gross written premiums (GWP), which were up 6% to GBP4.4bn from GBP4.1bn in the first half of 2020.

Meanwhile, the group saw record flows into its Savings & Retirement schemes, with net flows up by 24% to GBP5.2bn from a year earlier.

Profit before tax from continuing operations tumbled to GBP396mln from GBP739mln the year before. A loss on the disposal of continued operations and losses from those operations saw the company fall into the red with a loss of GBP198mln versus a profit the previous year of GBP874mln.

The group said it saw “strong growth” in cash remittances, which shot up to GBP1.29bn from GBP150mln the year before.

Operating profit from continuing operations improved by 17% to GBP725mln from GBP621mln but was below the consensus forecast of GBP781mln.

Solvency II operating own funds generation rose 12% to GBP710mln (2020: GBP632mln). The Solvency II shareholder cover ratio edged up to 203% from 202% at the end of 2020.

The interim dividend has been increased by 5% to 7.35p from the previous year’s payout of 7p.

The company’s whirlwind GBP7.5bn disposal programme is expected to complete by the end of this year with the company using some of the proceeds to slash debt. Having paid off GBP2bn in debt in the first half of the year, the insurer said it expects an additional reduction in debt of around GBP1bn and to repay an internal loan of GBP700mln.

Aviva said it expects to see continued growth in Savings & Retirement, adding that the bulk purchase annuity business has seen a strong start to the second half.

In general insurance, the group sees “excellent opportunities for growth in commercial lines” as it capitalises on its brand recognition with brokers and the favourable rate environment.

In personal lines, lower pricing and claims have somewhat offset each other but the softer rate environment in motor in the UK, Ireland and Canada will increasingly have an impact on earnings, Aviva predicted.

Weather conditions have been benign in the first half of the year, but July has been a different kettle of fish, with floods in the UK and hail storms in Canada; nevertheless, Aviva expects its combined operating ratio – a measure of how wisely it has insured risk – to be below 94% for the full year.

“We have made good progress on all fronts in the 12 months since we launched our strategy,” said Amanda Blanc, the group’s chief executive officer.

“Alongside delivering growth, we continue to focus on reducing controllable costs, which are down 2%. We are on track to deliver our GBP300 million savings target in 2022 and are focused on achieving top quartile efficiency in all our businesses.

“While we’ve got more to do, our half-year results show we have what it takes to drive growth in our businesses. We remain completely focused on transforming performance, capitalising on the breadth of Aviva, making insurance simple and easy for our customers, and creating value for our shareholders,” she added.

James Andrews of Money.co.uk said Aviva continued to show promising growth in the second quarter.

“”Looking ahead, Aviva needs to demonstrate it’s got a functioning plan for turning its huge cash inflows into ongoing returns for shareholders – as well as navigating changing risks as climate change sees protection claims rise – to continue the impressive share price growth seen in the past 12 months,” Andrew said.

Nicholas Hyett at Hargreaves Lansdown wondered whether Aviva’s apparent identity crisis is now over.

“Aviva seems to have finally settled itself down to life as a fairly boring, but highly cash generative insurance business. Investors are enjoying the fruits of the transition, with bumper shareholder returns,” Hyett suggested.

“The group does have some growth options – most notably sizeable workplace pension and advisor businesses which are scooping up assets, some of which are making their way through to the long unloved Aviva Investors – but the vast majority of the business is more ‘steady-eddie’ than ‘eddie the eagle’. General insurance is a difficult market to differentiate yourself in, and bulk annuities aside, the market for guaranteed retirement income is not what it once was.

“A good illustration of the group’s new found conservatism is the work done to patch up the balance sheet – cutting debt and leaving management with a sizeable capital surplus. Some of that is earmarked for shareholder returns, but aggressive overseas expansion seems to be off the cards.

“Still Aviva in its current format 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,” he suggested.

Russ Mould, the investment director at AJ Bell, reckons the hard work starts now for chief executive Amanda Blanc, now she has done a lot of the obvious stuff, such as jettisoning Aviva’s non-core operations.

“Attention is likely to switch to the performance of the remaining core business,” Mould suggested.

“This makes worse than expected first-half profits a bit of a problem. For now investors seem relatively forgiving of the misstep, but if Aviva were to start making a habit of it, they might not be quite so forgiving.

“The reason behind the weaker than forecast showing is weakness in the bulk annuity market – where pension schemes buy an insurance policy to cover future pensions and benefits due to be paid to its members,” Mould explained.

“It helps when this bitter pill on profit is sweetened by a very chunky return of capital, though still short of what activist investor Cevian had been pushing for since it joined the register of shareholders in June.

“The presence of Cevian means there is little chance of Blanc resting on her laurels and they are likely to keep her feet to the fire as they look for progress on driving down costs,” Mould cautioned/

Shares in Aviva were up 4.0% at 423p.

— adds analyst comment and share price reaction —


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