FTSE 100 insurer Aviva’s results blow past estimates

Aviva’s headquarters in London. Photo: BEN STANSALL/AFP via Getty Images.

Aviva’s progress is self-evident, with any number of metrics having blown past both expectations as well as the numbers from the corresponding period, underlining the progress the group has made in the last year alone.

Its previous purchases of AIG Life UK, which boosted its protection presence, and Probitas, which provided exposure to the Lloyd’s of London market and an estimated addressable market of £200 billion of distribution opportunities, were important and timely moves. These were then trumped by the announcement of the Direct Line acquisition, which was well received and with good reason. The Direct Line integration is progressing seamlessly, cost synergies are well on track to meet targets and the boost to group profitability already in evidence.

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Perhaps most importantly, it further cements Aviva (LSE:AV.)’s leading positions particularly in the home and car insurance markets. While car insurance has seen a substantial increase in premiums to the exasperation of many consumers, the space has been affected by both higher average new car prices (equating to higher insured valuations) as well as the costly nature of repairing increasingly complex and technologically advanced vehicles.

Meanwhile, the group as it currently stands has seen growth virtually across the board in the first half, with overall operating profit spiking by 24% to £1.33 billion, comfortably ahead of the £1.25 billion expected. Its General Insurance Premiums, the area in which Direct Line now sits, rose by 29% to £8.09 billion (£7.7 billion expected), underpinned by growth of 42% to £5.91 billion in the UK & Ireland. Wealth net flows increased by 32% to £7.6 billion, with Assets Under management spiking by 25% to £261 billion. While the costly cash requirements of the Direct Line deal have prevented any share buybacks of late – although such a return may not be far off - the dividend was increased by 7%, leading to a projected yield of 5.6%, more than adequate compensation for shareholders in the interim.

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Aviva is continually looking to strengthen its suite of products while also edging towards a more capital-light framework, where it estimates that more than 75% of profit will fall under this description on completion of the three-year targets. Those targets seem within easy reach following this update. Operating earnings in the period grew by 10% (target 11%), Return on Equity by 20.3% (more than 20%) and cash remittances by 47% to £1.5 billion (more than £7 billion over three years).

Exposure to general insurance can mean calculating risks to unknown events ranging from climate change-induced flooding to wildfires in Canada, while previous non-core disposals have reduced some of its geographical diversity. Bulk Purchase Annuity sales remain volatile and health sales during the first quarter came up against reduced consumer demand, although Aviva is committed to the longer-term prospects in this area.

Nonetheless, the group is an increasingly capital-light business in terms of growth opportunities, while some geographical diversity is still in evidence via its burgeoning business in Canada. The share price growth has led to a valuation which is now well above the historic level, although for the moment this multiple is clearly justified. Indeed, there could be scope for a further rerating should the group complete the switch from being regarded as a general insurer rather than a pure life insurer, which tends to carry higher price valuations.

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The obvious attractions of a group which continues to play to its strengths has resulted in the share price having risen by 8% over the last year, as compared to a gain of 17% for the wider FTSE 100 and by 43% over the last two years. A more recent spike of 16% over the last three months has been the result of improving sentiment and the high growth which Aviva has shown in these numbers are a vindication of such renewed appetite. The market consensus of the shares as a cautious buy reflects the higher valuation but does not detract from the fact that the group continues to forge ahead and underline its leading credentials in the sector.