ii view: Aviva sales grow, but Covid overshadows

Aviva shares continue to underperform rivals. Can management turn it around?

First-quarter update to 31 March 2020

• General Insurance sales up 3%
• New life business up 28%
• Previously cancelled 2019 final dividend payment

Chief executive Maurice Tulloch said:

"In responding to Covid-19, Aviva moved quickly to support our customers, introducing a range of measures to help, including financial assistance.  I am proud of how Aviva's people have adapted and maintained excellent day to day service for our customers when they need us most."

"Aviva had a solid first quarter of trading. At 31 March, our estimated solvency ratio remains strong at 182% and incorporates Covid-19 related impacts. The economic outlook remains uncertain and will affect our business, however the strength of our capital and liquidity means we are well positioned to manage this crisis and continue to support our customers."

ii round-up:

Life and general insurer Aviva (LSE:AV.) today posted gains in sales over the first quarter but pointed to weaker activity in the Covid hit second quarter. 

Early year general insurance sales rose by 3% to £2.4 billion, aided by growth for its Canadian operations. New business life sales jumped by 28% to £12.3 billion, helped by the continuing trend for companies to offload their staff pension scheme annuities to insurers under bulk arrangements. 

Aviva’s capital buffer remained strong at 182%, helped by management’s earlier decision to cancel its 2019 final dividend payment under restraint calls from both the UK regulator and European industry body. 

Aviva shares rose by just under 1% in early UK trading, although are down just over 40% year-to-date. Shares for rivals Legal & General (LSE:LGEN) and Prudential (LSE:PRU) are down by 34% and 23% respectively, outperforming Aviva. Both L&G and Pru decided to pay their end of year dividends. 

Broker Morgan Stanley today highlighted its belief that Aviva’s cancelled dividend would be paid later this year following management’s promised review.

But, as of the end of April, Covid-19 was estimated to be responsible for £160 million of general insurance claims under travel and business interruption policies. 

Early second-quarter new business sales had declined due to government lockdowns, while around 5% of its corporate bond portfolio is in sectors most directly impacted by Covid-19, such as airlines, retail, leisure, and oil & gas. 

Aviva also estimates that commercial and residential property price falls in the region of 15% and 12% respectively could be seen, followed by long-term growth. 

Legal action from some customers for non-payment of business interruption cover during the pandemic could now be faced – policy terms which Aviva disputes.  

ii view:

The future vision for the company involves making it simpler, more competitive and more commercial. Under relatively new leader Maurice Tulloch, Aviva has now been simplified into the five core divisions of Investments, Savings and Retirement, UK Life, General Insurance, Europe Life and Asia Life. 

In 2019, customer numbers rose by 2% to 33.4 million. A focus on cost reduction now sees it targeting a reduction of around 6% of its 30,000 staff over the next few years. The group’s financial strength remains strong. 

However, there is still much to do. The value of new business and net written general insurance premiums each only increased by 2% over 2019. In the last 10 years, and with investors turning to stock market investments as bank deposit rates stayed ultra-low, Prudential and Legal & General shares have risen by 115% and 155% respectively - Aviva shares have fallen by 21%. The dividend decision under Covid-19 has year-to-date added to its underperformance. 

Aviva’s brand name is strong, but it needs to work hard to find the growth initiatives which its major rivals have managed.  

Positives: 

• Relatively new CEO looking to provide renewed clarity of purpose
• Cost cutting programme

Negatives:

• Final 2019 dividend cancelled/suspended
• Possible legal claims for Covid-19 business interruption cover

The average rating of stock market analysts:

Buy