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Aviva confident despite interest rate cut

The life insurer is confident in the wake of rock-bottom interest rates
August 8, 2016

Aviva (AV.) may be trading against a backdrop of feeble interest rates and economic uncertainty, but chief executive Mark Wilson remains confident. The facts are a great antidote for uncertainty, he says. Indeed, the life insurer performed well against all its important metrics during the first half of the year. Cash remitted to the group increased by more than half to £752m, while capital generated by the businesses totalled £1.2bn, supporting a 10 per cent increase in the dividend.

IC TIP: Buy at 413.2p

The UK and Ireland life business led the way in driving profit growth, with operating profit up a quarter to £711m. However, this was mainly due to an extra three months of contribution from Friends Life, which also boosted the life business's underwriting margin. Without this UK life generated a low to mid-single digit increase in operating profit. Improved protection sales and integration synergies helped. However, annuity sales declined by more than a quarter, as falling bulk annuity sales offset individual annuity sales, which were actually higher despite the advent of 'pension freedom'.

Domestic general insurance and health operating profit dipped from £239m to £231m, impacted by the £23m Flood Re levy and a £55m increase in weather-related claims. However, a new partnership with emergency repair and maintenance specialist Homeserve (HSV) helped bump up gross written premiums by 8 per cent to £2bn. In Canada and France, increased claims also dampened operating profit for the respective general insurance businesses.

Management is putting more emphasis on the group's fund management business, trying to draw in more third-party cash. Growing its multi-asset funds helped boost margins for the business and generated an additional £17m in operating profit. Funds under management increased by £28.7bn to £319bn, with £1.7bn of inflows, further assets transferred with Friends Life and positive market movements.

Analysts at Shore Capital expect adjusted pre-tax profit of £1.14bn for December 2016, giving EPS of 51.7p (from £1.41bn and 49.7p last year).

 

AVIVA (AV.)

ORD PRICE:413.2pMARKET VALUE:£16.8bn
TOUCH:413.2-413.3p12-MONTH HIGH:538pLOW: 290p
DIVIDEND YIELD:5.2%PE RATIO:32
NET ASSET VALUE:444p* 

Half-year to 30 JuneGross life premiums (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201511.151012.86.75
201612.66552.57.42
% change+14+28-80+10

Ex-div: 6 Oct

Payment: 17 Nov

*Includes intangible assets of £7.4bn, or 183p a share