ii view: Aviva – working hard on Direct Line integration

First-half results to 30 June 

• Operating profit up 22% to £1.068 billion
• General Insurance premiums up 7% to £6.29 billion
• Wealth net flows up 16% to £5.8 billion
• Health premiums up 14% to £1 billion
• Capital cushion or solvency II ratio of 206%, up from 201% in late March
• Interim dividend up 10% to 13.1p per share

Guidance:

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

Chief executive Amanda Blanc said:

“Another set of high-quality results, combined with excellent strategic progress, are further evidence of how we are pushing Aviva forward. We completed the acquisition of Direct Line at the beginning of July, just six months after our recommended offer, and integration is well underway. 

“Over the past five years we’ve transformed the performance and prospects of Aviva. Today we are the UK’s leading diversified insurer, with a strong track record of delivery, and an unwavering commitment to our customers.”

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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 21 million customers across the UK, Ireland, and Canada. 

It operates via the four arenas 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 these latest results announced on 14 August, please click here. 

ii view:

Employing over 25,000 people, a recent takeover of general insurer Direct Line Group now sees it providing services for four in every 10 UK adults. Aviva is now a top three UK provider in each of the business lines in which it operates. Management is now focused on integrating the acquisition of Direct Line given regulatory approval in July, and generating annual operating profit of £2 billion by 2026 versus £1.77 billion in 2024. Further targets regarding Direct Line are expected alongside a Q3 trading update scheduled for 13 November. 

For investors, retirement related sales fell 3% during this latest period to £2.95 billion, with volumes of bulk annuity purchases for 2024 expected to be lower than 2024. Increased exposure to general insurance leaves Aviva calculating risks in relation to unknown events such increased flooding under global climate change and wildfires in Canada. An estimated share price-to-net asset value (NAV) comfortably above the three-year average may suggest the shares are not obviously cheap, while previous business disposals have reduced geographical diversity. 

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On the upside, the acquisition of Direct Line further pushes Aviva towards capital light growth opportunity businesses offering potentially higher investment returns for shareholders. An existing focus on increasing efficiency is now further extended by the integration of Direct Line. 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%. 

For now, and despite ongoing risks, a forecast dividend yield above 5.5% and potential for growing shareholder returns via the acquisition of Direct Line, are likely to see investors remain interested in this popular UK-focused insurance play.   

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