ii view: Aviva confident despite Direct Line probe

First-quarter trading update to 31 March 

• General Insurance premiums up 9% to £2.9 billion
• Retirement sales up 4% to £1.8 billion
• Protection & Health sales by 19% to £126 million
• Capital cushion, or solvency II ratio of 201%, down from 203% at end of 2024

Guidance:

• Continues to target £2 billion of operating profit by 2026, up from £1.77 billion in 2024

Chief executive Amanda Blanc said:

“Aviva has got off to a great start in 2025. We continue to trade strongly, serving our customers well, growing profitably right across the group, and demonstrating the resilience of our diversified business in a period of market volatility. 

“The acquisition of Direct Line is firmly on track. Direct Line shareholders voted overwhelmingly in favour of the transaction and we expect to complete the deal in the middle of the year. 

“We continue to be very positive about the outlook for 2025. Our balance sheet is strong, we have a clear customer-focused strategy which we continue to deliver at pace and our market-leading businesses are growing well, especially in capital-light areas. We are increasingly confident about Aviva’s prospects and meeting our financial targets.”

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ii round-up:

Aviva (LSE:AV.) provides savings, retirement pension products and general insurance including car and home cover to around 20.5 million customers across the UK, Ireland, and Canada. 

It operates via the four areas of Insurance, Wealth & Retirement (IWR), covering protection insurance such as life and health as well as savings; General Insurance covering items such as homes and cars; Aviva Investors encompassing its asset management operations; and international investments, taking in its business partnerships in both China and India. 

For a round-up of this latest trading update announced on 15 May, please click here. 

ii view:

Tracing its history back over 300 years, Aviva today competes with rivals like Legal & General Group (LSE:LGEN) and Phoenix Group Holdings (LSE:PHNX). Employing over 25,000 people, in 2024 it paid £29.3 billion in claims and benefits to customers and has returned £10 billion to shareholders during the last four and a half years. 

Insurance, Wealth and Retirement generated its biggest slug of profits in 2024 at 51%. That was followed by UK and Irish general insurance at 34%, Canadian general insurance at 14% and Aviva Investors or its fund management division the balance of just over 1%. Management goals are focused on accelerating capital-light growth, aided by the acquisition of Direct Line, and delivering on shareholder promises including the targeting of £2 billion of operating profit by 2026 versus £1.77 billion in 2024.

For investors, a review of its takeover of insurer Direct Line by the government’s Competition and Markets Authority (CMA) now offer uncertainty about the transaction. A decision is currently expected by 10 July, although this date is subject to change. Exposure to general insurance leaves it calculating risks in relation to unknown events such as wildfires in Canada, increased flooding and global climate change. Geographical diversity has been reduced following various business sales, while a forecast share price-to-net asset value (NAV) comfortably above the three-year average may suggest the shares are not obviously cheap. 

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On the upside, Aviva highlights itself as the largest life insurer in the UK, holding a 24% share of the market. A government transfer of responsibility to individuals to save for their own pensions is aiding demand, with retirement services accounting for 70% of profit at its IWR division in 2024. Acquisitions are ongoing, with its potential takeover of Direct Line aiding its capital light push and potentially taking operating profits from capital light businesses to 70% from 56% currently. Product and geographical diversity exist, including exposure to China and India via investments, while Aviva’s capital cushion, or Solvency II ratio remains robust at over 200%. 

In all, uncertainty regarding its acquisition of Direct Line and the CMA’s ongoing review cannot be overlooked. That said, targeted further growth in profits by management out to 2026 plus a forecast dividend yield of over 6% should keep investors interested. 

Positives: 

• Targeting costs
• Attractive dividend yield (not guaranteed)

Negatives:

• Reduced geographical diversity
• General insurance is subject to events outside of management’s control

The average rating of stock market analysts:

Buy