High-yielding Aviva to pay out in '17

Shoring up the life assurer's balance sheet by improving cash generation and reducing debt has been a top priority for chief executive Mark Wilson since taking the helm in 2013. The group looks well on track with this objective. During the first half of 2016 cash generation improved to £752m, an increase of more than half on the previous year. The UK life business is driving this growth. This business grew its operating profits by a quarter to £711m and doubled its cash generation to £577m during the first six months of 2016.

Life insurance follows UK gilts

A three-month contribution from Friends Life - which has traditionally been highly cash generative - was largely behind the increase. However, even without this operating profits for this business still grew by low-to-mid single digits. This organic growth was thanks to its protection business, which includes insurance against illness or unemployment, as well as the benefit of certain synergies from the Friends Life acquisition. The integration of Friends Life has run ahead of schedule and by the end of June Aviva had secured £201m of the £225m targeted operational synergies for the end of 2016. This included reducing headcount by more than 1,500 and reducing its property footprint.

Asset management arm Aviva Investors has also benefited from the addition of Friends Life, providing £47bn in assets to the business. During the first six months of the year the business gained £1.7bn in net inflows, with an additional £1.5bn transferred across from Friends Life. Along with positive exchange rate movements and £15bn of market gains, assets under management rose by £29bn in the six months to the end of June to £319bn.

Lower-for-longer interest rates are a risk for all life insurers, making retirement and savings products less attractive, as well as pushing up the value of liabilities as gilt yields fall. This can in turn reduce an insurer's Solvency II ratio and Aviva estimates that for every 25 basis point reduction in interest rates the group's solvency coverage falls by 3 per cent. During the first half of the year Aviva's Solvency II ratio reduced to 174 per cent, from 180 per cent in the previous year. Although it is worth noting that this was still superior to all its peers, bar Prudential (PRU).

However, there could be some good news for life assurers during 2017 if recent trends in the bond market persist. UK 10-year government bond yields have been on the rise since late summer (see chart) and life assurers' shares have followed suit. What's more, the election of Donald Trump and subsequent rise in sovereign debt yields globally and December's Fed rate rise has been seen by many as a sign of a decisive turn in the direction of the bond market after a 30-year bull run.