Aviva pays out £300mn buyback and ups the dividend

In a possible sign that its executives are enjoying life without the attentions of activist investors, Aviva (AV.) treated shareholders to another £300mn buyback, plus an uprated outlook for its dividend, as hardening rates combined to boost its organic capital generation. The £8.8bn surplus it currently has above its solvency II regulatory requirements meant funding both the dividend and the buyback was straightforward for the full-line insurer.

Given Aviva’s importance as an income share for many investors, it was pleasing that management raised the outlook for the cash cost of the dividend to mid single digits, from low-to-mid single digits. The payout, which cost £915mn in these results, rose by 8 per cent compared with this time last year.    

The main driver for the results is the underwriting growth in its core markets of UK & Ireland and Canada, plus a better claims ratio of 60.5 per cent – reflecting partly an easing of inflation in car parts supply chains and normalisation after the pandemic. UK & Ireland saw strong underwriting growth, with new gross premiums of £6.64bn, compared with £5.74bn for 2022. The Canadians also did their bit, with written premiums rising by 6.2 per cent to £4.24bn.

However, it wasn’t all about organic growth, and Aviva took the interesting step of re-entering the Lloyd’s insurance market with the recent post-period acquisition of Probitas underwriting syndicate for £242mn. The deal allows Aviva the tenancy rights to syndicate 1492, whose gross written premiums totalled £288mn last year and has achieved a 21 per cent compound annual growth rate since 2019. Lloyd's has been enjoying an excellent year on the back of hardening rates, but Aviva sees the deal as a way of strengthening its international and speciality insurance segments.

The deal follows a relatively brisk series of acquisitions. Aviva has recently spent £100mn to acquire Optiom in Canada and shelled out £460mn for AIG’s UK protection business with its 2.5mn customers.

Aviva is looking leaner and more focused after restructuring and selling off almost all its non-core operations over the past few years. With over £5bn in special payouts alone and a dividend that continues to grow, the company’s rating of nine times FactSet consensus earnings forecasts for 2024 looks underrated. With its return-on-equity now over 30 per cent, a slimmed-down Aviva is the version we like the most. Buy.

Last IC view: Buy, 388p, 16 Aug 2023